Buying a house with high debt to income ratio

Your debt-to-income ratio, or DTI, is the percentage of your monthly gross income that goes toward paying your debts, and it helps lenders decide how much you can borrow.

DTI is as important as your credit score and job stability. A high debt-to-income ratio was the most common primary reason for mortgage denials in 2020, according to a NerdWallet analysis of federal mortgage data.

Calculate your DTI

How debt-to-income ratio is calculated

Lenders calculate your debt-to-income ratio by dividing your monthly debt obligations by your pretax, or gross, monthly income.

DTI generally leaves out monthly expenses such as food, utilities, transportation costs and health insurance, among others.

You’ll want the lowest DTI possible not just to qualify with the best mortgage lenders and buy the home you want, but also to ensure you’re able to pay your debts and live comfortably at the same time.

Types of debt-to-income ratios

Front-end ratio

Also known as a household ratio, front-end DTI is the dollar amount of your home-related expenses — your future monthly mortgage payment, property taxes, insurance and homeowners association fees — divided by your monthly gross income.

Back-end ratio

Your back-end DTI includes all the other debts you pay each month — such as credit cards, student loans, personal loans and car loans — in addition to home-related expenses. Back-end ratios tend to be higher, since they take into account all of your monthly debt obligations.

DTI ratio examples

Say your monthly gross income is $7,000, and your housing expenses are $1,800. Your front-end, or household ratio, would be $1,800 / $7,000 = 0.26 or 26%.

To get the back-end ratio, add up your other debts, along with your housing expenses. Say, for instance, you pay $350 on a car loan, $250 on student loans and $200 toward credit cards each month. Your monthly housing expenses plus debt payments would be $2,600. Your back-end ratio would be $2,600 / $7,000 = 0.37 or 37%.

Which DTI ratio matters more?

While mortgage lenders typically look at both types of DTI, the back-end ratio often holds more sway because it takes into account your entire debt load.

Lenders tend to focus on the back-end ratio for conventional mortgages — loans that are not backed by the federal government.

For government-backed mortgages, such as FHA loans, lenders will look at both ratios and may consider DTIs that are higher than those required for a conventional mortgage.

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What is a good DTI ratio?

A good target for a front-end DTI ratio is below 28%, and a good target for a back-end DTI is below 36%.

But you can qualify for a mortgage with a higher DTI. The requirement will vary by the lender and type of mortgage.

Ideally, though, you’ll want to keep your DTIs as low as possible, regardless of lenders’ limits. Paying down debt will help improve your credit score, and a higher credit score and lower DTI ratio will help you get a better mortgage interest rate.

DTI isn't a full measure of affordability

Although your DTI ratio is important when getting a mortgage, the number doesn't tell the whole story about what you can afford.

DTIs don't take into account expenses such as food, health insurance, utilities, gas and entertainment, and they count your income before taxes, not what you take home each month.

You’ll want to budget beyond what your DTI labels as “affordable,” and consider all your expenses compared with your actual take-home income.

If your DTI is high

The higher your DTI ratio, the more likely you are to struggle with qualifying for a mortgage and making your monthly mortgage payments.

Pay off debt

To lower your DTI ratio, pay off as much of your current debt as possible before applying for a mortgage. In most cases, lenders won’t include installment debts like car or student loan payments as part of your DTI if you have just a few months left to pay them off.

Avoid taking on more debt

Don't make any big purchases on credit cards before you buy a home, for example.

Wait to apply

If your debt-to-income ratio is exceptionally high — say 50% or more — it probably makes sense to wait to make a home purchase until you've reduced the ratio.

Before you sit down with a lender, use a mortgage calculator to help figure out a reasonable mortgage payment for you.

The lower your debt-to-income ratio, the safer you are to lenders — and the better your finances will be.

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