Debt-to-income ratio (DTI) is your monthly debt payments divided by your gross monthly income, which is pay before taxes. On a mortgage, lenders read it two ways. The housing ratio, or front-end ratio, is the new house payment alone. The total ratio, or back-end ratio, adds car loans, card minimums, student loans and every other debt on your credit report. "Good" depends on which program you want, because each one draws its line in a different place.
Where each program draws the line
| Ratio | Where it matters | At $5,500 a month | Left for the house after $450 in debts |
|---|---|---|---|
| 29% housing | USDA standard housing ratio | $1,595.00 | $1,595.00 |
| 36% total | Fannie Mae's standard limit on a manually underwritten Conventional loan | $1,980.00 | $1,530.00 |
| 41% total | USDA standard total ratio and VA's guideline | $2,255.00 | $1,805.00 |
| 46.9% housing | FHA housing limit, automated approval | $2,579.50 | $2,579.50 |
| 50% total | Conventional limit, automated approval | $2,750.00 | $2,300.00 |
| 56.9% total | FHA total limit, automated approval | $3,129.50 | $2,679.50, capped at $2,579.50 by FHA's housing limit |
Read the table from the top down. At 41% or less, every major program can approve you on its standard ratios. At 36% or less, even a hand-underwritten Conventional loan works, and Fannie Mae allows up to 45% on one with a strong score and savings. Above 41%, VA still approves when residual income (the money left each month after the house payment, debts and living costs) is at least 20% over VA's table, USDA can go higher with an automated GUS Accept, and Conventional and FHA have room built in.
A worked example on $5,500 a month
Morgan earns $5,500 a month gross and pays $450 a month in debts: a $330 car payment and $120 in card minimums. Morgan finds a home with a house payment of $1,800, including taxes, insurance and mortgage insurance.
- Housing ratio: $1,800 divided by $5,500 is 32.7%.
- Total ratio: $1,800 plus $450 is $2,250, divided by $5,500 is 40.9%.
At 40.9%, Morgan clears VA's guideline, Conventional's 50% and FHA's 56.9%. Only USDA's 29% housing standard is tight, and an automated GUS Accept can approve above it.
The same $5,500 income reaches different prices depending on the ratio. On FHA 100% financing at a 5.75% rate, with property tax at 0.95% of the price a year and $283 a month for insurance, a $1,805 house payment (41% total) buys about $218,000. FHA's housing limit of $2,579.50 buys about $330,000. A good ratio is the one that gets you approved at a payment you're comfortable carrying, and on FHA that range runs wide.
Why a lower ratio still helps
A ratio under 41% does more than clear the limits. Automated underwriting systems weigh the ratio along with score, savings and payment history, so a lower DTI can offset a thinner credit file or less money in the bank. It also leaves room for the surprises that show up late in a purchase, such as a higher insurance quote or a property tax figure above the estimate.
Getting your ratio down
- Pay a card or small loan to $0. A paid-off card drops its whole minimum payment. Each $100 a month removed adds roughly $14,000 of FHA buying power at a 5.75% rate when the total ratio is the limit.
- Add a co-borrower. A parent's income, including Social Security grossed up 15% on FHA, goes into the math with yours.
- Count all your income. Overtime, bonus income and a part-time job with a history can count.
- Lower the house payment. A seller credit spent on discount points, a home with lower taxes, or no HOA all shrink the housing ratio.
The lower DTI fast page walks through each move with the math.
The DTI calculator shows your housing and total ratio on FHA, Conventional, VA and USDA at once. When you want the ratio run on a real home and a real credit report, call AAA Capital Funding at 888-601-8344.