## What is Debt-to-Income Ratio?
Your Debt-to-Income (DTI) ratio is a personal financial measure that compares your monthly debt payments to your monthly gross income. Your gross income is your pay before taxes and other deductions are taken out. The debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments.
Lenders use this ratio to measure your ability to manage monthly payments and repay the money you plan to borrow.
## The Two Types of DTI Ratios
Lenders typically look at two different DTI ratios:
### 1. Front-End Ratio (Housing Ratio)
This ratio shows what percentage of your gross income would go toward your monthly housing expenses, including mortgage payments, property taxes, and homeowners insurance. A general guideline is to keep this under **28%**.
### 2. Back-End Ratio (Total Debt Ratio)
This ratio includes all your monthly debt obligations plus your new housing expense. This counts credit card minimums, car loans, student loans, and other predictable monthly debts. Lenders generally prefer this to be below **36%**.
## Why DTI Matters
While your credit score is important, your DTI ratio is equally critical when applying for a mortgage. A high DTI ratio suggests that you might have too much debt for your income level, making you a higher risk for lenders.
## How to Improve Your DTI Ratio
If your DTI ratio is higher than you'd like, there are two main ways to improve it:
1. **Reduce your monthly debt:** Focus on paying off high-interest credit cards or smaller loans to lower your total monthly obligations.
2. **Increase your gross income:** Raises, bonuses, or secondary income streams can help lower the percentage.
Use the calculator below to see where you stand based on the standard 28/36 rule. You may also want to evaluate your Loan to Value (LTV) ratio for a more complete picture.
