Question 1

What is a good debt-to-income ratio?

Accepted Answer

A DTI ratio of 36% or lower is generally considered good by most lenders. A ratio below 20% is excellent, indicating very manageable debt levels. Between 37% and 43% is acceptable but may limit your borrowing options. Above 43% is considered risky by most lenders and may prevent you from qualifying for conventional mortgages.

Question 2

What debts are included in DTI calculations?

Accepted Answer

DTI includes recurring monthly debt payments: mortgage or rent, car loans, student loans, minimum credit card payments, personal loans, child support, and alimony. It does not include utilities, groceries, insurance premiums (unless bundled with your mortgage), cell phone bills, or other living expenses. Lenders focus specifically on obligations that appear on your credit report.

Question 3

How does DTI affect mortgage approval?

Accepted Answer

DTI is one of the primary factors in mortgage approval. Conventional loans typically require a DTI of 43% or less, while FHA loans may allow up to 50% with strong compensating factors. VA loans have more flexible guidelines but still consider DTI. Even if you meet the maximum DTI threshold, a lower ratio typically gets you better interest rates and loan terms.

Question 4

Should I use gross or net income for DTI?

Accepted Answer

Lenders always use gross monthly income (before taxes and deductions) when calculating DTI. This includes salary, wages, bonuses, commissions, investment income, rental income, and other documented income sources. While this is the industry standard, it means your actual disposable income is lower than what the DTI ratio implies. Self-employed borrowers typically use their adjusted gross income from tax returns.

Question 5

How can I lower my debt-to-income ratio?

Accepted Answer

There are two main strategies: reduce your monthly debt payments or increase your income. To reduce debt, focus on paying off credit cards and small loans first, consider consolidating debts at a lower rate, or refinance existing loans for lower payments. To increase income, you might negotiate a raise, take on a side job, or include additional income sources in your application. Avoid taking on new debt before applying for a loan.

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