How Debt-to-Income Ratio Impacts Your Mortgage Approval

29 June 2025

Buying a home is a big deal — emotionally, financially, and everything in between. It’s exciting, nerve-wracking, and sometimes downright confusing. One term that often gets thrown your way during this journey is “Debt-to-Income Ratio,” or DTI for short. Sounds fancy, right? But don’t worry! We’re going to break it all down in a way that actually makes sense (and yes, maybe we’ll even have fun with it!).

So grab a cup of coffee, find your cozy corner, and let’s talk about how your DTI can make or break your chances of scoring that dream home!

🧮 What on Earth Is Debt-to-Income Ratio?

Alright, let’s start with the basics. Your Debt-to-Income Ratio is a simple comparison of how much you owe each month to how much you earn. It’s like a financial Snapchat that tells lenders how “stretched” you are.

Here's the formula:

DTI = (Total Monthly Debt Payments / Gross Monthly Income) × 100

Let’s say you make $5,000 a month before taxes, and your total debt payments (like student loans, car loans, credit cards, and the mortgage you’re applying for) add up to $2,000 a month. Your DTI would be:

($2,000 ÷ $5,000) × 100 = 40%

Simple, right?

🏡 Why Mortgage Lenders Care So Much About DTI

Lenders look at a lot of things when you apply for a mortgage — your credit score, your job history, your down payment, and yes, your DTI. But why is DTI such a big deal?

Well, it shows how much wiggle room you have in your budget. If most of your income is already spoken for, lenders get nervous. They worry you might struggle to keep up with mortgage payments. And, honestly, so should you.

Think of it this way — if your financial life was a pizza (mmm, pizza 🍕), DTI tells lenders how many slices are already eaten by other expenses. The more slices you’ve already handed out, the fewer you have left for your house payment. Make sense?

💡 The "Magic Numbers" Lenders Like to See

Now you're probably wondering, “What’s a good DTI?” Great question!

Here’s a general breakdown:

- 36% or lower: This is the golden zone! You’re looking 👏 financially 👏 healthy. Most lenders will be happy.
- 37%–43%: This is the gray area. Some lenders may still approve you, especially if other parts of your application are strong (good credit score, large down payment, stable job).
- Over 43%: Uh-oh. 🚨 This sets off alarm bells. Lenders get cautious, and mortgage approval becomes much harder.

In fact, many lenders follow the “28/36” rule:
- 28% of your gross monthly income can go to housing costs (like your mortgage, property taxes, and insurance).
- 36% can go to total debts (including housing + other debts like car or student loans).

🛠️ Types of Debt That Go Into Your DTI

Let’s break it down. Not all payments count toward your DTI, but here are the usual suspects that do:

- Mortgage (or the projected mortgage)
- Student loans
- Car loans
- Credit card minimum payments (yep, even small ones)
- Personal loans
- Alimony or child support (if legally required)

Now, here’s what doesn’t count:

- Utilities (water, electricity, internet)
- Groceries
- Gas or transportation costs
- Insurance (health, auto, etc.)
- Subscriptions (Netflix doesn’t scare lenders… yet 😅)

It might feel like the stuff not included should matter too, but lenders stick to recurring debts.

💬 Real Talk: How a High DTI Hurts Your Mortgage Chances

Imagine two people: Jess and Sam. Both want to buy similar homes.

- Jess earns $6,000/month and has $1,200 in monthly debts.
- Sam also earns $6,000/month but has $3,000 in debts.

Jess has a DTI of 20% — lenders love it. Sam’s DTI? A whopping 50% — yikes!

Even if Sam has a decent credit score, lenders will be hesitant. Why? Because if unexpected bills pop up (like car repairs or job loss), Sam might be in hot water. Jess, on the other hand, has more breathing room.

💪 How to Lower Your DTI (and Boost Your Mortgage Odds!)

Here’s where things get exciting — you’re not stuck with your current DTI! You can absolutely lower it and make your application shine. Let’s cover some ways:

1. Pay Down Debt

This is the obvious one — knock those balances down! Start with high-interest credit cards or loans with small balances. Every little bit helps.

2. Avoid Taking New Debt

Now’s not the time to finance a new car or open a store credit card just for the discount. Keep things chill while prepping for your mortgage.

3. Increase Your Income

Easier said than done, right? But even a side hustle or asking for a raise can tip the scales in your favor.

4. Refinance or Consolidate Loans

If you’ve got multiple debts with high payments, consolidating them into a single lower-interest loan can bring down your monthly burden.

5. Delay Other Big Purchases

Putting off that dream vacation to Bali might sting, but buying your dream home will feel so much better. Trust me.

🕵️ How Lenders Check Your DTI (Spoiler: They Look Closely)

When you apply for a mortgage, you’ll provide:

- Pay stubs
- Tax returns
- Bank statements
- Debt documentation (like loan statements)

Lenders plug all that into their calculators and come up with your DTI. It’s one of the biggest deciding factors they’ll use. They’re not trying to be nosy — they’re trying to protect themselves (and you) from a risky loan situation.

🧩 DTI vs. Credit Score – Which One Matters More?

Ah, the age-old question! Both your DTI and your credit score carry a lot of weight. Think of them like two legs on the same table. A great credit score tells lenders you’ve historically been good with debt. A low DTI says you’ve got room to take on new debt.

If one is weaker, the other can sometimes balance it out. But ideally, you want both in a good place.

🏦 Different Loan Types Have Different DTI Requirements

Not all mortgages are created equal! Here's how DTI limits can vary based on the type of loan:

🏡 Conventional Loans

- Preferred DTI: < 36%
- Max Allowed: Around 43% (may vary by lender)

🏠 FHA Loans

- Preferred DTI: < 43%
- Max Allowed: Sometimes up to 50% (with compensating factors like a high credit score)

🏚️ VA Loans (for Veterans)

- Preferred DTI: < 41%
- Max Allowed: Flexible, depending on overall financial health

🌾 USDA Loans (for rural & suburban buyers)

- Preferred DTI: < 41%
- Max Allowed: Typically up to 46%

💭 What If Your DTI Is Too High?

First off — don’t panic. It’s not a dead end; it’s just a detour.

If your DTI is holding you back:

- Work on lowering it (as we talked about).
- Consider waiting a few months, paying down debt, saving more, and trying again.
- Shop around — some lenders are more flexible than others.
- Look into different loan options (like FHA or VA, depending on your eligibility).

🎯 Final Thoughts: Make Your DTI Work for You

Here’s the deal — understanding your DTI puts you in control. It’s like holding a map on your home-buying adventure. A low DTI doesn’t just help you get approved; it gives you options. Better loan terms. Lower interest rates. More negotiating power. And most importantly, peace of mind.

So, if you're dreaming of walking through your new front door (maybe even with a welcome mat that reads “Home Sweet Home”), now you know one key to unlocking that dream.

Take control of your DTI. Polish it up. And high-five yourself on the way to mortgage approval. You’ve got this!