What is the Income Ratio for a Mortgage? A Complete Guide

When applying for a mortgage, one of the most important factors lenders consider is your debt-to-income ratio (DTI). This measures your monthly debt payments against your monthly gross income.

Lenders want to ensure you can afford the new mortgage payment on top of your existing debts. If your DTI is too high, you may be denied for the mortgage or only approved for a smaller loan amount.

So what is the typical income ratio lenders look for on a mortgage application? Keep reading to learn more about DTI how it’s calculated and what ratios lenders prefer to see from borrowers.

What is Debt-to-Income Ratio?

Your debt-to-income ratio compares your monthly debt payments to your monthly gross income before taxes. It’s stated as a percentage.

To calculate DTI

• Add up all your monthly debt payments
  • This includes credit cards, auto loans, student loans, existing mortgages, child support, alimony, etc.
  • Do not include living expenses like groceries, utilities, etc.
• Divide this total by your gross monthly income
• The result is your DTI percentage

For example:

• Monthly debts:
  • Credit card: $200
  • Auto loan: $300
  • Existing mortgage: $1,000
• Total monthly debts: $1,500
• Gross monthly income: $4,000
• DTI calculation: $1,500/$4,000 = 37.5%

So this person’s DTI is 37.5%. The lower your DTI, the less risky you generally are to a lender.

What is a Good DTI for a Mortgage?

When reviewing a mortgage application, lenders look at two key debt-to-income ratios:

1. Front-end DTI: Compares your new mortgage payment to your gross monthly income. Lenders typically want this ratio to be 28% or lower.

2. Back-end DTI: Compares all your monthly debts including the new mortgage payment to your gross monthly income. Lenders typically want this ratio to be 36% or lower.

So when applying for a mortgage, you generally want to aim for:

• Front-end DTI: 28% or less
• Back-end DTI: 36% or less

This means your new mortgage payment should not exceed 28% of your gross monthly income. And your total debts including the new mortgage should not exceed 36% of your income.

Meeting these standard DTI ratios gives you the best chance of mortgage approval. However, some lenders may approve higher ratios on a case-by-case basis if you have strong credit scores, significant assets, or other positive factors.

How Lenders Calculate DTI for Mortgages

When you apply for a mortgage pre-approval or full mortgage, the lender will calculate your DTI ratios themselves based on the income and debts you disclose. Here’s how they typically calculate it:

New Mortgage Payment

The lender will calculate an estimated monthly mortgage payment based on:

• Loan amount you’re requesting
• Estimated interest rate
• Loan program and term
• Property taxes
• Homeowners insurance

This estimated payment is used for the front-end DTI calculation.

Gross Monthly Income

Lenders will verify your monthly gross income using:

• Current pay stubs
• W-2s and tax returns
• Proof of any additional income like bonuses or dividends

Any tax-exempt income may be adjusted upward to account for the nontaxable status.

Total Monthly Debts

Lenders will verify your monthly debts using:

• Your credit report
• Requested debt verification documents
• Any other debts disclosed on your application

Tips for Improving Your DTI for Mortgage Approval

If your DTI ratios are too high, here are some tips to improve your chances of mortgage approval:

• Pay down existing debts – This can significantly help lower your back-end DTI. Pay off credit cards, auto loans, student loans, etc.

• Avoid taking on new debts – Don’t open new credit cards or take out auto loans before applying for a mortgage. This can negatively impact DTI.

• Make a larger down payment – This lowers the mortgage loan amount, which results in a lower monthly payment and improves your front-end DTI.

• Increase your income – Boosting your stable monthly income can help lower your DTI. Consider taking on a side job or freelance work.

• Choose a longer mortgage term – Stretching the repayment term from 15 to 30 years lowers the monthly mortgage payment used in DTI calculations.

• Bring in a co-borrower – Adding a second borrower combines both incomes to qualify for the mortgage and improve DTI.

• Apply with a non-conforming lender – Some specialized lenders may approve higher DTIs than conventional loans.

The standard front-end DTI of 28% and back-end DTI of 36% give you the best chance for quick mortgage approval. But don’t be discouraged if your ratios are a little higher. With some adjustments, many borrowers can still qualify for financing.

Other Factors Lenders Consider Along with DTI

While DTI is very important, it’s not the only factor lenders look at when reviewing a mortgage application. Here are some other aspects that come into play:

• Credit scores – Minimum scores and history requirements apply. Many lenders want at least a 620 FICO score.

• Down payment amount – Larger down payments reduce risk for lenders. Expect to put down at least 3-20%.

• Employment history – Steady income and 2+ years in your line of work are ideal.

• Assets and reserves – Liquid assets and money in your accounts indicate financial stability.

• Property type – Primary residences are preferred over investment properties.

• Loan amount – The lower the loan-to-value ratio the better.

So while DTI carries weight, having strengths in other areas can help offset a higher DTI when applying for a mortgage.

The Takeaway

Your debt-to-income ratio is a key factor lenders review to assess whether you can truly afford a mortgage payment on top of your existing debts.

Aim to keep your front-end DTI around 28% or less and back-end DTI to 36% or less when applying. This gives you the best chance of approval for the mortgage amount and terms you want.

Pay close attention to your DTI along with the other variables lenders analyze. This helps set you up for mortgage success, allowing you to smoothly move forward with purchasing your dream home.

Income scenarios to pay a 500k mortgage