Your Debt-to-Income (DTI) ratio is the percentage of your gross monthly income that goes toward debt payments, including your proposed housing payment.
To calculate: add up all monthly debt payments (car loans, student loans, credit card minimums, personal loans) plus your proposed PITI (principal, interest, taxes, insurance). Divide by your gross monthly income.
Lenders use DTI to determine how much you can afford. Maximum DTI varies by loan type: FHA up to 57%, Conventional up to 50%, VA no set maximum.
Step-by-Step Calculation
Step 1: Add all monthly debt payments. Step 2: Add proposed housing payment (PITI). Step 3: Add steps 1 and 2. Step 4: Divide by gross monthly income. Step 5: Multiply by 100 for percentage.
Example
Income: ,000/month. Debts: car 00, student loan 00, credit card 0 = 50. Proposed housing: ,800. Total: ,450. DTI: ,450 / ,000 = 40.8%.
What Debts to Include
Include: car loans, student loans, credit card minimum payments, personal loans, alimony/child support, and proposed housing payment. Exclude: utilities, groceries, insurance (non-housing), and cell phone bills.
Front-End vs Back-End
Front-end DTI: housing cost only (PITI / income). Back-end DTI: all debts including housing. Lenders primarily use back-end DTI. Conventional typically wants front-end under 28%.
By Loan Type
FHA: up to 57% back-end (with compensating factors). Conventional: up to 50% back-end (with strong credit). VA: no maximum but must have residual income. USDA: up to 46%.
How to Improve DTI
Pay down credit card balances (lowers minimum payment). Extend auto loan term (lower payment). Pay off small debts. Increase down payment (lower housing payment). Increase income.