What Is Debt-to-Income Ratio and Why Does It Matter When Buying a Home?

You can have a good income, a good credit score, and still not qualify for the mortgage amount you expected. One reason may be your debt-to-income ratio, commonly called DTI. Simply put, DTI help lenders answer, how much of your monthly income is already committed to debt?

How Is DTI Calculated?

Your DTI compares your monthly debt payments with your gross monthly income (your income before taxes and other deductions).

The basic calculation is:

Monthly debt payments ÷ Gross monthly income × 100 = DTI

For example, suppose you earn $5,000 per month before taxes and the monthly debt payments are $2,000.

$2,000 ÷ $5,000 = 40% DTI

That means 40% of your gross monthly income would be committed to debts in this calculation.

Your Monthly Payment Matters, Not Just Your Balance

This is where DTI is often misunderstood. Lenders generally aren't adding up all of your outstanding debt and comparing that total with one month's income. They're looking at the required minimum payments.

For example:

You have a credit card with a $5,000 balance. Your required minimum payment is $80 per month.

For the DTI calculation, the lender would count the $80 minimum payment not the entire $5,000 balance.

Now imagine you also have a $10,000 auto loan with a $450 monthly payment. Even though the total balance isn't dramatically higher, that $450 payment has a greater effect on your monthly DTI.

This is why two people who owe the same total amount of money can have very different debt-to-income ratios.

What Debts Usually Count?

Depending on the mortgage program and your circumstances, lenders may include monthly obligations such as:

• Your proposed mortgage payment
• Car loans
• Student loans
• Credit card minimum payments
• Personal loans
• Child support or alimony obligations when applicable
• Other recurring debts required under the loan program

Your lender will make the official determination about which obligations must be included.

What Usually Doesn't Count?

Normal household expenses generally aren't included in the standard DTI calculation, such as:

• Groceries
• Cell phone service
• Electricity, water and gas
• Car insurance
• Streaming subscriptions
• Routine household expenses

But there's an important distinction. Not being included in your DTI doesn't mean an expense doesn't matter to your budget.

You still have to pay for groceries, utilities, transportation, childcare, insurance, home repairs and everything else that comes with everyday life.

That's one reason why qualifying for a mortgage and comfortably affording a mortgage aren't the same thing.

Lenders May Look at Two Ratios

You may hear a lender refer to a housing ratio and a total debt ratio.

The housing ratio looks primarily at how much of your gross income would go toward the proposed housing payment. The payment usually includes the principal, interest, property taxes, homeowners insurance, mortgage insurance and applicable HOA expenses.

The total DTI goes further. It combines the proposed housing payment with the other monthly debts the lender is required to count.

The acceptable ratios depend on your mortgage program, credit profile, and how your loan is underwritten.

What About Georgia Dream?

The Georgia Dream Homeownership Program provides a useful example of how credit and DTI can work together.

Under current Georgia Dream guidelines, borrowers with credit scores between 640 and 699 generally have a maximum housing-expense ratio and total DTI of 45% when using automated underwriting.

Borrowers with scores of 700 or higher may have additional flexibility based on the automated underwriting system's approval.

This is another reason your credit score doesn't operate by itself during mortgage qualification.

Have Student Loans?

Student loans can make DTI more complicated. The monthly amount a mortgage lender uses may depend on your loan program, repayment status, and available documentation.

This is particularly important if you're:

• On an income-driven repayment plan
• Making a $0 required payment
• In deferment
• In forbearance

Don't assume the number shown on your credit report is automatically the amount your mortgage lender will use. Ask your lender what monthly student loan payment will be included in your DTI calculation before estimating how much mortgage you may qualify for.

Could Paying Down Debt Help Your DTI?

Potentially, but remember what DTI measures monthly obligations.

Paying down a debt doesn't necessarily improve your DTI unless doing so reduces or eliminates the monthly payment your lender must count.

Before draining your savings to pay off debt, talk with your lender or housing counselor. The cash you have available can also matter during mortgage approval and after you become a homeowner.

Why This Matters

Your salary doesn't tell a lender how much of that income is already spoken for.

DTI helps fill in that missing piece.

Understanding how your monthly payments affect your DTI can help you make sense of your mortgage pre-approval, identify debts that may be affecting your buying power, and ask better questions before applying.

But remember DTI measures mortgage qualification, not your entire life.

A lender's calculation can't tell you how much you spend on groceries, childcare, transportation, utilities, medical needs, or everything else your household has to manage. The mortgage you qualify for and the mortgage you can comfortably afford may be two different numbers.

Sources: Georgia Department of Community Affairs, Consumer Financial Protection Bureau, Fannie Mae, U.S. Department of Veterans Affairs