Underwriting & credit
Debt-to-Income Ratio: Definition & Example
Also called: DTI
What Is a Debt-to-Income Ratio?
Debt-to-income ratio (DTI) is the percentage of a person’s gross monthly income that goes toward monthly debt payments, including housing, car loans, student loans, and minimum credit card payments.
What does debt-to-income ratio mean?
DTI equals total monthly debt payments divided by gross monthly income. It is one of the main measures lenders use to judge whether a borrower can take on a new payment.
Mortgage lenders usually look at two versions: the front-end ratio (housing costs only) and the back-end ratio (all debts). Limits depend on the program. A 43% back-end DTI is a widely cited benchmark, while automated approvals for some loans can go to 50% with strong compensating factors.
DTI counts required payments on debts, not living expenses like groceries or utilities. It is based on gross income, so two borrowers with the same DTI can have very different amounts left over after taxes.
Debt-to-income ratio example
A borrower earns $6,000 per month gross. Her proposed mortgage payment is $1,650, her car loan is $400, her student loan is $250, and her minimum credit card payment is $100. Total debt is $2,400, so DTI is $2,400 ÷ $6,000 = 40%.
Related terms
- Front-End RatioThe front-end ratio is the percentage of gross monthly income that goes toward housing costs: mortgage principal and interest, property taxes, homeowners insurance, and HOA dues or mortgage insurance.
- Back-End RatioThe back-end ratio is the percentage of gross monthly income used for all monthly debt payments, including housing, car loans, student loans, credit cards, and other recurring debts.
- Gross Monthly IncomeGross monthly income is the total amount a person earns in a month before taxes, retirement contributions, insurance premiums, or other deductions are taken out.
- Residual IncomeResidual income is the money left over each month after paying major obligations such as housing, debt payments, taxes, and basic living costs. The term also refers to passive income that keeps arriving after the initial work.
- Compensating FactorsCompensating factors are strengths in an application, such as large savings, long job history, or low payment shock, that can offset a weakness like a high debt-to-income ratio or thin credit.
Debt-to-income ratio FAQ
- What is a good debt-to-income ratio?
- Lower is better. Many lenders prefer 36% or less, and 43% is a common upper benchmark for mortgages, though some programs allow more with compensating factors.
- Is rent included in debt-to-income ratio?
- When applying for a mortgage, the new housing payment replaces current rent. For other loans, some lenders include rent as a monthly obligation.
