In more detail
Lenders usually look at two versions. The front-end ratio counts only housing costs (mortgage or rent, property tax, insurance); the back-end ratio adds every other required debt payment, such as car and student loans and card minimums. Everyday bills like groceries, utilities and phone plans are not included. Income is gross, before tax. Lenders often want a back-end DTI under about 36% and a lower share for housing alone, though limits vary by lender and loan type.
Why it matters
A high DTI can block a mortgage even with a good credit score, and taking on a car loan just before applying can push you over a lender's limit. Lowering DTI means paying debts down or raising income; paying off a small debt with a large payment helps more than one with a small payment.
Example
Gross monthly income is $6,000. Housing costs $1,500, a car loan $350 and card minimums $150:
- Front-end DTI: 1,500 / 6,000 = 25%
- Back-end DTI: 2,000 / 6,000 = 33%
- Adding a $400 car payment: 2,400 / 6,000 = 40%
Common confusion
The rent-to-income ratio looks only at rent, often against gross income too, and is used by landlords rather than lenders.