On this page
What's next
Earn a high-yield savings rate with JG Wentworth Debt Relief
What Debt to Income Ratio is Needed for a Mortgage?
by
JG Wentworth
•
July 23, 2024
•
8 min
Getting a mortgage is a rewarding rite of passage for many adults, but one that can also be the source of a lot of stress – stress that is made worse if you’re struggling with debt. One of the most important factors mortgage lenders scrutinize is your debt-to-income ratio (DTI). This ratio weighs your recurring monthly debts against your gross monthly income to gauge how much new mortgage payment you can reasonably afford. Having too much debt relative to your income can severely hamper your ability to qualify for a home loan or get approved for your desired mortgage amount.
So, what is the ideal DTI and how can you achieve it? Let’s break it down…
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
How is DTI calculated?
The debt-to-income ratio is calculated by adding up all of your recurring monthly debt payments and dividing that total by your monthly gross income (income before taxes and deductions).
DTI = Total Monthly Debt Payments / Gross Monthly Income
Your total monthly debts generally include:
- Projected mortgage payment (principal, interest, taxes, insurance) on the new loan
- Minimum credit card payments
- Student loan payments
- Auto loan payments
- Any other loan payments like personal loans
- For self-employed borrowers, gross income is typically based on average monthly income over the last two years.
Debt-to-income ratio standards
Most mortgage lenders adhere to standard DTI ratio limits based on guidelines from Fannie Mae, Freddie Mac, FHA, VA, and other mortgage sources. However, these vary depending on the loan program:
- Conventional loan: For conventional mortgages that conform to Fannie Mae and Freddie Mac rules, the general maximum DTI allowed is 45-50% of your gross monthly income. For example, if your gross monthly income is $8,000, your total debt payments cannot exceed $4,000 (50% DTI).
- FHA loan: FHA loans backed by the Federal Housing Administration are available to borrowers with lower credit scores and smaller down payments. The maximum DTI ratio is capped at 43% for borrowers with credit scores of 620+. Those with scores of 500-619 may be approved with even higher debt ratios if there are compensating factors like substantial cash reserves.
- VA loan: For military borrowers getting a VA loan guaranteed by the U.S. Department of Veteran Affairs, there is no strict DTI limit. However, many VA lenders use 41% as a benchmark DTI ratio to gauge affordability.
- Other loan types: Non-qualified mortgage programs like bank portfolio loans usually have different standards, with some banks allowing debt-to-income ratios up to 50%.
Lenders also consider other factors
While debt ratios are critical, mortgage lenders holistically evaluate several factors beyond just your DTI:
- Credit score and credit history
- Down payment amount and equity position
- Cash reserves in the bank
- Overall income stability
- Specific compensating factors that allow more flexibility
So, in some cases, a borrower may get approved despite having a debt-to-income ratio that exceeds the program’s guidelines if their overall application is very strong in other areas.
However, those purchasing a home should strive to keep their debt-to-income ratio as low as possible to improve borrowing costs and safeguard themselves from future financial hardship. Most experts recommend a DTI below 36% as a more affordable standard to target.
By understanding mortgage debt-to-income ratio requirements upfront, borrowers can evaluate their financial standing and make any needed adjustments to bring their debt loads and recurring liabilities back into an acceptable range before applying for a home loan.
To explore your personalized loan options today, check out our free online tool.
"*" indicates required fields
Need to improve your DTI?
If your mounting debt is becoming more than you can reasonably manage by yourself, you might want to consider debt relief. At JG Wentworth, we’ve helped countless individuals resolve their debt through our Debt Relief Program.* In fact, if you have $10,000 or more in unsecured debt, there’s a good chance you’ll qualify and get the JGW advantage.
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- 24/7 support
- We only get paid if we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
About the author
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy.
