What is the Debt-to-Income (DTI) Ratio and Why is it Important?

By Adena Hefets – Updated June 12, 2023

The real estate and mortgage worlds are filled with acronyms and key words every aspiring homebuyer needs to know, but there is one that is especially important to any aspiring homebuyer: DTI, or the debt-to-income ratio.

What is the Debt-to-Income (DTI) Ratio?

Your debt-to-income ratio (DTI) is calculated by dividing your monthly debt payments divided by your gross monthly income. Most lenders use this number to measure your ability to repay the money you plan to borrow, whether for a home, car, or other type of loan.

For lenders, a lower DTI ratio makes a borrower more attractive and less risky, as the borrower is more likely to have enough income to cover any existing and new debt payments. For example, if your DTI ratio is 25%, that means that roughly 25% of your income is going toward debt payments. 

What is the Payment-to-Income (PTI) Ratio?

The payment-to-income (PTI) ratio is similar to the DTI ratio in that it also measures a borrower’s ability to repay a loan, but it’s focused on the monthly payment specifically. To calculate PTI, you divide your monthly loan payment by your gross monthly income. This is sometimes referred to as the housing expense ratio.

To determine how much income should be put toward a monthly mortgage payment, there are several rules and ratios you can use – but the most popular is the 28% rule, which states that no more than 28% of your gross monthly income should be spent on housing costs.

Why is the Debt-to-Income Ratio Important? 

This number is what mortgage lenders are laser-focused on as they determine whether or not you can qualify for a mortgage, in addition to other factors, like a credit score or income. Ultimately, a customer’s ability to qualify for a mortgage can be based on their DTI and PTI ratios — the combination of higher interest rates and higher home prices have pushed these ratios to historically high levels, meaning that even well-qualified buyers are being priced out of the market today. 

If you’re an aspiring homebuyer, keep a close eye on your debts and payments as they relate to your monthly income. Keeping these ratios squarely in-line with what mortgage lenders expect will keep you on the path to homeownership and help you qualify for good loan terms when you decide to buy.

What is a Good Debt-to-Income Ratio?

While different loan products and lenders will have different DTI limits, a ratio of 43% tends to be the maximum amount at which you’re able to qualify for a mortgage. However, the common advice has typically been that your DTI ratio should be no more than 36% – this indicates that you have a healthy amount of income each month to cover your debt payments in addition to contributing to other expenses and savings. Additionally, a rule of thumb is that your PTI ratio shouldn’t exceed 25%-28%. This is often referred to as the 28/36 rule (28% for PTI and 36% for DTI). 

GSEs (government-sponsored enterprises), such as Fannie Mae and Freddie Mac, often use a higher DTI ratio and can go up to a max of 50%, but banks usually put measures in place that mitigate this. Depending on credit score, a buyer may also be qualified at a higher DTI ratio. Keep in mind that mortgage approvals at a higher DTI ratio and/or lower credit score may come with less favorable terms or interest rates. 

Read our tips for buying a house with a lower credit score.

How to Calculate Debt-to-Income Ratio

To calculate your DTI ratio, first add up monthly costs and debts such as your mortgage, utilities, other loans like auto and student loans, and credit cards. Then, divide that total by your gross monthly income (what you make before taxes). If you’re working with a lender to get approved for a loan, we recommend confirming which monthly debt payments they plan to use when calculating your DTI ratio. 

DTI Ratio Calculation Example

Let’s say your monthly gross income is $7,500 and you have monthly debt payments of:

  • Housing (rent or mortgage): $1,500
  • Car: $350
  • Student loans: $250
  • Credit cards (minimum monthly payments): $250
  • Total monthly debt payments: $2,350

You would divide your $2,350 monthly debt payments by your $7,500 income by your to get a DTI ratio of 31%. Your PTI ratio would be $1,500 (monthly housing payment) divided by $7,500, or 20%. Based on the 28/36 rule mentioned earlier, these are healthy ratios that would likely be viewed positively by lenders.

Note: This example is for illustrative purposes only. 

How does Divvy Use the DTI Ratio When Reviewing Applicants?

Divvy is a modern take on rent-to-own, where you can rent your dream home while saving up for your homeownership goals (like a down payment). If you qualify, we’ll make an all-cash offer on a home on the market and rent it to you. While you save, you’ll have the option to purchase the home at a preset price for each year of the lease. If you change your mind and don’t want to purchase the home, you can walk away with your savings, minus a relisting fee of 2% of the initial purchase price.

Divvy looks at both the DTI and PTI ratios when determining approval for applicants. While we don’t have a set threshold for these ratios, a 50% DTI ratio is often our maximum limit which is a bit more lenient than a traditional mortgage lender. However, DTI isn’t the only number we look at when reviewing applications – credit score, income, and other factors are also included. See our full list of qualifications here.

Frequently Asked Questions About the DTI Ratio

What is a good debt-to-income ratio?

To qualify for a mortgage, most lenders look for a DTI ratio of 43% or less. However, a DTI ratio of 36% or less is considered good.

How do you calculate debt-to-income ratio?

To calculate DTI, divide your monthly debt payments (e.g. housing, cars, credit cards, other loans) by your gross monthly income (what you make before taxes).

What is a bad debt-to-income ratio?

A DTI ratio above 43% is considered high, with anything over 50% being too high. If your DTI ratio is above the 43% mark, you may have difficulty getting approved for a mortgage or other loans.

How do I lower my debt-to-income ratio?

You can lower your DTI ratio by either increasing your income or decreasing your monthly debt payments. If you have outstanding loans, you could pay down a bigger chunk of these to reduce the size of your monthly payment. Additionally, purchasing less with credit cards could improve your DTI ratio depending on how much those minimum payments contribute to your total monthly debt payments.

What is the 28/36 rule?

The 28/36 rule states that a household should spend a maximum of 28% of gross monthly income on housing expenses (the PTI ratio), and a maximum of 36% on total debt payments (the DTI ratio). 

Adena is the co-founder & CEO of Divvy Homes, a proptech company on a mission to make homeownership accessible to everyone. Divvy was named a Time100 ‘Most Influential Company’ in 2022. Prior to founding Divvy, Adena joined Square in 2013 and was responsible for building out Square Capital, a merchant cash advance platform with billions in loans outstanding. Prior to joining Square, she was part of the large-cap buyout team at TPG, a private equity firm, where she helped purchase companies in the real estate sector. She started her career as an investment banker at Merrill Lynch.

Adena holds a Bachelors of Science, Policy Analysis and Management from Cornell University and a Masters of Business Administration, Stanford Graduate School of Business. She was named 40 Under 40 by Fortune and is backed by Andreessen Horowitz, Tiger Capital, and Caffeinated Capital. She currently lives in Oakland, California.