What debt-to-income (DTI) ratio is needed to buy a house?
Mortgage lenders calculate a borrower’s debt-to-income ratio (DTI) for a home loan to determine the likelihood a borrower will be able to financially manage making monthly mortgage payments. If the borrower’s DTI is too high, it is possible the loan will not be approved, or, the loan may be approved with a higher interest rate and private mortgage insurance required.
The debt-to-income ratio for a home loan varies depending on the type of mortgage loan and the lender’s requirements.
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What is the debt-to-income ratio?
The debt-to-income (DTI) ratio for buying a house is a comparison between your income and your monthly debt payments. Your debt-to-income ratio is the sum of all your monthly debt payments divided by your gross monthly income. According to the Consumer Financial Protection Bureau, this number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.
There are several factors that determine
how much house you can afford to purchase. These factors include credit score, income, debt-to-income ratio, down payment amount, and more.
Learn more about what is debt-to-income-ratio.
Types of debt-to-income ratios
There are two primary types of DTI, front-end DTI, and back-end DTI.
Front-end DTI. This ratio takes into consideration all the expenses that are related to a house or property, including your rent or mortgage payments, property taxes, homeowners' insurance monthly payments, and homeowners associate dues (if applicable).
To calculate front-end DTI, add your housing-related debt and divide this number by your monthly income. For example, if you have monthly gross income of $6,000, who pays $2,500 in monthly housing payments, you will have a front-end DTI ratio of 41%.
Back-end DTI. This takes into consideration the amount of your income used to pay all monthly debt including your current rent or mortgage, plus credit cards, student loans, and a car loan.
For example, if you have a monthly gross income of $6,000 and $3,000 in monthly liabilities (a $2,500 monthly mortgage/insurance payment and $500 in credit card payments), you will have a back-end DTI ratio of 50%. In this case you would not likely qualify for a mortgage loan.
Lenders will consider both your front-end and back-end DTI ratios to decide your risk as a borrower. Different lenders have unique lending criteria, and each type of mortgage loan program has unique requirements as well. Working with an experienced mortgage loan officer can help you get the mortgage that works best for your financial position.
Debts used to calculate debt-to-income ratio
When you apply for a mortgage, the lender will ask to see proof of your monthly debt payments and use these figures to calculate your DTI for the mortgage.
The debts considered for DTI are:
- Credit cards. All outstanding balances will be added.
- Installment loans. This includes any debt that you are paying off in installments, such as an auto loan, medical bills, student loans, etc.
- Other mortgages. This monthly payment will count toward your debt.
- Support payments. This includes spousal support and child support.
Debts excluded from the debt-to-income ratio
These kinds of debts and payments that are not added to the DTI for a mortgage:
- Food/entertainment
- Phone/cable bill
- Utility bills (water, gas, electric, etc.)
- Existing mortgage debt to be paid-off within 10 months or less (at lender’s discretion)
How to calculate your debt-to-income ratio
- Add up your monthly debt payments (excluding utility, phone, and food expenses).
- Divide monthly payments by gross monthly income (the amount of money you earn before your taxes and other deductions are taken out).
- Convert to percentage by multiplying the decimal by 100.
Example debt-to-income ratio calculation:
Let’s say you have $2,500 monthly debt payments.
If your gross monthly income is $6,000, divide $2,500 ÷ $6,000 = .41 x 100 = 41%
What's a good debt-to-income ratio for buying a house?
As you prepare to shop for a home and a mortgage, keep in mind these DTI thresholds:
Less than 36%. This is the ideal debt to income ratio that lenders are looking for. A DTI ratio below 36% means you can likely take on new debt.
36% to 42%. This range may still be acceptable for getting a mortgage loan, however you may want to
pay off credit card debt to lower and improve your DTI ratio.
43% to 50%. This range represents a good debt-to- income ratio for a mortgage.
Most lenders look for a DTI ratio of 43% or less, although some will accept up to 50%.
Over 50%. If you have a DTI ratio over 50 and you want to get a mortgage you will need to try increasing your income and reducing your debt. It may take some time but with effort it is possible.
Debt-to-income ratio requirements by mortgage type
Each type of mortgage loan has a different DTI ratio requirement.
Conventional loan.
Conventional mortgage loans are the most common type of mortgage. The DTI ratio for conventional loans may be up to 50%; however, most lenders prefer a DTI ratio of no more than 43%.
FHA loan. An
FHA loan is a type of government-insured mortgage loan that has more relaxed qualifying requirements than conventional mortgage loans provided by private lenders. A DTI of 43% is generally required, although some lenders may allow a higher DTI.
VA loan.
VA mortgage loans are insured by the U.S. Department of Veterans Affairs, VA loans are available to qualifying U.S. Armed Forces Veterans, Active Duty Service Members, certain Reservists and National Guard members, and certain surviving spouses of deceased Veterans. The DTI ratio requirement is 41%.
USDA loan. To purchase a home with a USDA loan, the home must be in an eligible rural area as defined by USDA United States Department of Agriculture. The ideal debt to income ratio is up to 41% for a USDA loan, which is a type of government-insured
non-conforming mortgage loan.
How to lower your debt-to-income-ratio
If your DTI is too high, here are some strategies to help you lower your debt-to-income ratio.
- Pay off debt. Reducing debt will have a significant impact on your DTI. If you’re saving money to buy a home, before putting money aside start paying down and paying off your credit card debts.
- Refinance existing loans. Refinancing to a lower interest rate means your monthly payment amount will be reduced.
- Research loan forgiveness. Loan forgiveness programs are often connected to student loans.
- Pay off high-interest loans. Whenever you have extra money available, pay off your high-interest loans and debts first. You’ll reduce your debt and save money on interest payments too.
- Find a co-signer. Purchasing a home using a mortgage can be challenging on one income. Getting a co-signer (such as a spouse, partner, parent, or relative) on the mortgage loan can help you get approved. The lender will consider the income and debt of both people. A co-signer is equally as responsible for the mortgage payments and will have to pay the loan if the primary signer fails to pay.
- Increase income. Getting a second job to increase your monthly income or asking for a pay increase can help you pay off your debts and increase your income ratio.
Can I get a mortgage with a high DTI?
If you have a high DTI, you may be able to get a mortgage loan. Lenders look at several factors when evaluating a borrower’s debt-to-income ratio for buying a house and their ability to repay a mortgage loan, including your credit score and the loan-to-value (LTV) ratio on the property. If you have an excellent credit score and the LTV is within the acceptable range, this could work in your favor.
Why savvy consumers choose CU SoCal
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Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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