How lenders use DTI to decide mortgage approval

Debt-to-Income (DTI) is a core underwriting metric. It helps lenders answer a simple question: can you afford the loan without undue strain? Underwriting typically evaluates two ratios:

  • Front‑end ratio (housing ratio): monthly housing costs (principal, interest, taxes, insurance, HOA) divided by gross monthly income. Many conventional lenders aim for a front‑end near 28%–31%.
  • Back‑end ratio (total DTI): all recurring monthly debt payments (housing + credit cards, auto loans, student loans, child support, and other installment debt) divided by gross monthly income. The back‑end or total DTI is the figure most often referenced as “DTI.”

Regulatory and market practice matter. The Consumer Financial Protection Bureau explains how DTI fits into the Ability‑to‑Repay and Qualified Mortgage (QM) rules; a common QM benchmark is 43% total DTI, though exceptions exist for loans backed by government agencies or with strong compensating factors (CFPB: https://www.consumerfinance.gov).

In my practice helping clients prepare mortgage files, I see underwriters weigh DTI alongside credit score, cash reserves, employment history, and the loan‑to‑value (LTV). A 36% DTI with strong credit and reserves will generally fare better than a 43% DTI with borderline credit.

How to calculate DTI (step‑by‑step)

  1. Add up recurring monthly debt payments. Include minimum credit card payments, scheduled student loan payments (or the payment used by your lender for income‑based loans), auto loans, personal loans, child support, and any other contractual monthly obligations. If a debt is paid off or can be removed from the application before closing, it should not be included.
  2. Identify gross monthly income. This is your pre‑tax monthly income. For salaried borrowers, that’s straightforward; for hourly workers, use average monthly earnings; for self‑employed borrowers, lenders typically use adjusted net income from tax returns (often a two‑year average) and may add back allowable depreciation or non‑cash adjustments per program rules.
  3. Divide total monthly debt by gross monthly income and multiply by 100 to get a percentage.

Example: Monthly debts = $2,200. Gross monthly income = $6,000.
DTI = 2,200 / 6,000 = 0.3667 → 36.7% total DTI.

Typical DTI guidelines by loan type (what lenders often expect)

  • Conventional loans: lenders commonly prefer total DTI near 36% for the best pricing, and many overlays stop approvals above 43% without significant compensating factors.
  • FHA loans: more flexible; borrowers may qualify with total DTI up to about 50% in many cases, and occasionally higher when strong compensating factors are present (U.S. Department of Housing and Urban Development: https://www.hud.gov).
  • VA loans: no single printed DTI cap—lenders frequently use a 41% benchmark but will approve higher with strong residual income, credit, or other compensating factors (U.S. Department of Veterans Affairs and common lender practice).
  • USDA loans: typical maximum DTI is around 41% for many programs, subject to underwriter discretion.

Note: exact limits vary by lender, investor (Fannie Mae, Freddie Mac, Ginnie Mae), and current market conditions. The QM rule’s 43% benchmark is a regulatory floor for many lenders, but it’s not the only path to approval (CFPB: https://www.consumerfinance.gov).

Why DTI matters beyond simple approval

  • Interest rate and pricing: a higher DTI often increases your interest rate or loan pricing because lenders view you as higher risk.
  • Loan program access: certain programs and pricing tiers require lower DTI. Reducing your DTI can move you into a better pricing bucket.
  • Underwriting flexibility: compensating factors—stable employment, high reserves, large down payment, strong credit—can offset higher DTI.

Practical strategies to lower DTI before applying

  1. Pay down high‑interest and revolving debt first. Paying down credit cards reduces minimum monthly payments quickly and often has the biggest impact on DTI. In my practice, targeted payments to a single high‑balance card produced material DTI improvements within months.
  2. Increase gross income where feasible. A raise, a steady side gig, or documented rental income can raise the denominator of the DTI formula. For self‑employed borrowers, consistent, documented income over two years helps underwriters rely on those earnings (see our Mortgage Preapproval Checklist for Self‑Employed Borrowers for documentation tips: https://finhelp.io/glossary/mortgage-preapproval-checklist-for-self-employed-borrowers/).
  3. Refinance or restructure debts. Consolidating high‑interest loans into a lower monthly payment or extending a loan term can reduce the immediate monthly obligation—but be mindful of long‑term cost.
  4. Remove a debt from the credit report. If you can pay off an installment loan before closing, ask the lender to re‑pull credit. Removing the payment can significantly lower your DTI.
  5. Use a co‑borrower or co‑signer when appropriate. Adding income from a qualified co‑borrower can lower your effective DTI and improve approval odds; be aware of shared liability.
  6. Increase down payment. Lowering the loan amount reduces monthly housing cost and the front‑end ratio.

What counts (and what doesn’t) as debt

Included: minimum monthly payments on credit cards, scheduled installment payments (auto, student, personal loans), mortgage and proposed housing costs, alimony and child support if they are required, and any recurring contractual obligations.
Excluded or treated differently: utilities and groceries; discretionary spending; medical collections vary by lender; some lenders ignore paid‑collections or certain small balances. Discuss specifics with your lender.

Special considerations for self‑employed and nontraditional income

Lenders often average two years of tax returns for self‑employed borrowers and may add back certain non‑cash expenses. Documented, stable commissions, rental income, or other sources are usually acceptable with proper verification. See our self‑employed preapproval checklist for what files help underwriters accept income: https://finhelp.io/glossary/mortgage-preapproval-checklist-for-self-employed-borrowers/.

Common misconceptions

  • “A DTI above 43% automatically disqualifies you.” Not always. Government programs and lenders with compensating factors can approve higher DTIs.
  • “DTI and credit score are interchangeable.” They’re different. DTI measures monthly cash flow risk; credit score measures repayment history and severity of past delinquencies. Both matter.
  • “Only mortgage debt counts.” All recurring debt matters—student loans, credit cards, and auto loans typically enter the calculation.

How to present a stronger DTI story to an underwriter

  • Provide clear documentation of increased income (new salary, contract, or rental agreements).
  • Pay down visible revolving balances well before underwriting.
  • Demonstrate reserves: 2–6 months of mortgage payments in liquid assets can offset a higher DTI.
  • Show stability: steady employment, long tenure with one employer, or reliable self‑employment income helps.

Sample scenarios and outcomes

  • Borrower A: 28% front‑end, 36% back‑end, 780 credit score, 20% down → likely to receive favorable pricing and straightforward approval.
  • Borrower B: 31% front‑end, 48% back‑end, 720 credit score, minimal reserves → may receive a decline on a conventional loan but could secure FHA loan approval with higher DTI and compensating factors.

FAQ (short answers)

  • Can I get a mortgage with a high DTI? Yes — through FHA, VA, USDA, or lender exceptions — but terms may be less favorable and additional documentation or reserves will usually be required.
  • Does paying off a car loan immediately help? Yes. Eliminating an installment payment before closing drops your DTI quickly and measurably.
  • Will lenders use the same DTI calculation every time? Broadly yes, but program rules differ. Always ask the loan officer what specific payments and income the lender includes.

Final checklist before you apply

  • Calculate your current DTI precisely.
  • Pay down high‑impact monthly debts (credit cards, short‑term loans).
  • Gather proof of income and documentation for any non‑wage sources.
  • Consider lenders and loan programs that match your DTI profile; compare options.

Resources and further reading

  • Consumer Financial Protection Bureau — Ability to Repay and Qualified Mortgage Rule (background on DTI benchmarks): https://www.consumerfinance.gov
  • U.S. Department of Housing and Urban Development — FHA underwriting guidance: https://www.hud.gov

Internal resources

Professional disclaimer
This article is educational and does not constitute financial or legal advice. Mortgage guidelines change regularly; consult a mortgage professional or certified financial planner for advice tailored to your situation.

Author note
With over 15 years helping borrowers prepare loan files and negotiate terms, I’ve observed the single biggest, controllable factor many applicants can change before applying is DTI. Small focused actions—reducing a credit card balance, documenting income, or delaying a large purchase—often change a mortgage outcome more than waiting for long stretches to improve credit scores.