What is a conventional mortgage?
A conventional mortgage is a loan that’s not backed by the government. These loans have more flexibility but stricter qualifying requirements.
Ashley Eneriz
One major factor mortgage lenders look for in borrowers is their debt-to-income (DTI) ratio. Lenders want to know what types of debt you have and if you can balance them with a mortgage before approving your mortgage application.
“When it comes to debt-to-income ratio for a mortgage, think of Goldilocks testing bowls of porridge. You want it not too high, not too low, but just right,” said James Allen, founder of the personal finance website Billpin.
“Generally, lenders like to see your DTI below 43%. That means your monthly debts are less than 43% of your monthly income. This shows them you've got enough wiggle room in your budget to comfortably handle a mortgage payment.”
Your DTI ratio is calculated by adding up all your monthly debt payments (the money you have borrowed, not regular monthly bills) and dividing that by your gross monthly income — your paycheck before the taxes are taken out.
Not sure which bills count toward your DTI ratio calculation? This table will help you know what and what not to include.
Included in DTI ratio | Excluded from DTI ratio |
---|---|
Your current rent or monthly mortgage payment, including taxes and insurance if escrowed | Monthly utilities (e.g., electricity, gas, garbage) |
Monthly car loan payment | Cellphone bill |
Monthly minimum credit card payments (if carrying debt) | Internet or cable bill |
Monthly student loan payment | Car insurance premiums |
Monthly personal loan payment (including co-signed loans) | Health insurance premiums |
Monthly child support/alimony payments | Medical debt |
Monthly timeshare payments | Groceries, eating out or entertainment expenses |
Knowing your DTI ratio before talking with a mortgage lender is best since you will have to work on your number if your ratio is over 43%.
Note that while the Consumer Financial Protection Bureau (CFPB) says your DTI ratio does not include your rent payment, some mortgage lenders use it for their calculations. Also, for credit card debt, you should include your required minimum monthly payment rather than your most recent or average payment amount.
Let’s say you have a gross income of $5,000 per month. Your current monthly debt obligations are $1,000, which includes your student loan, car loan and some credit card debt. Your rent costs $2,000 per month.
To calculate your DTI, add your debt and rent together to get $3,000. Then divide $3,000 by $5,000, which equals .60 or 60%. In this scenario, your DTI is too high, and you will need to either decrease your debt responsibility or increase your income.
» MORE: How much house can I afford?
The CFPB recommends having a DTI of 36% or less, but says that some lenders will accept DTIs up to 43%.
Debt-to-income ratio = total monthly debt payments/gross monthly income.
Allen said that while lenders want to see a DTI of less than 43%, lower is better. “A lower DTI indicates you have more financial breathing room each month. So aim for the low 40s or even 30s if you can.”
A higher DTI ratio is not grounds for an automatic mortgage loan denial, though. If your DTI is higher, you still might be approved for a loan if you apply with excellent credit and a higher down payment.
The main difference between front-end and back-end DTI ratio is the inclusion of other debts. Both ratios are important for lenders to determine a borrower's overall financial health and repayment capacity. Here’s what they include:
“As for improving your DTI, it's just like getting in shape before a big race,” said Allen. “You want to reduce obligations where possible and increase your income if you can. Try paying down debts, especially ones with high interest, like credit cards or student loans. Their monthly payments can really weigh down your DTI ratio.”
If you can manage it, Allen also suggests taking on a part-time job or exploring investment income streams to increase your income and improve your DTI ratio.
Here are some more ideas to try:
Some mortgage types offer more flexible DTI ratio requirements than conventional mortgages.
Here are the max recommended DTI ratio requirements for each loan type, but remember, lenders have the final say on what is accepted.
According to Fannie Mae, self-employed applicants may or may not have to count their business debt in their DTI ratio. It depends on how clear it is that the debt is being repaid through the company and whether there is a history of delinquency.
Lenders will consider more than just your salary or wages when calculating your DTI. Your income will also include any side income, including selling items on eBay or driving for Uber Eats. You can also include child support, bonuses and tips, pension and Social Security.
While 55% is higher than the recommended DTI, some lenders offering government-backed loans, like an FHA or VA loan, might approve you for a mortgage. Expect to need a better credit score and a high down payment to get approval with a high DTI ratio.
DTI ratio, or debt-to-income ratio, is an important calculation lenders look at during the mortgage application process. Most lenders prefer mortgage applicants who have a DTI ratio of 43% or less.
However, this doesn’t mean you can’t buy a house with a higher DTI ratio, as requirements vary by lender, the type of loan and the size of the loan. You might still qualify if you have a strong credit score and are able to make a large down payment. Otherwise, there are steps you can take to lower your DTI ratio before filling out a mortgage application.
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