Debt-to-Income Ratio (DTI)

The debt-to-income ratio is calculated by dividing your total monthly debt payments by your gross monthly income. Lenders use this metric to determine your ability to manage monthly payments and repay borrowed money. A lower DTI indicates better financial health.

Most mortgage lenders prefer a DTI of 36% or lower, with no more than 28% going toward housing costs. Some loan programs accept DTIs up to 43% or even 50% with compensating factors like a large down payment or excellent credit score.

To improve your DTI, you can either reduce debt payments by paying off existing obligations or increase your income. Strategies include consolidating high-interest debt, making extra payments on the smallest balances first, or negotiating raises. A lower DTI not only improves loan approval odds but also qualifies you for better interest rates.