What Debt to Income Ratio Is Needed for Mortgage Loans for Buying a House This Year?

When people get a mortgage, the first thing they often think about is their credit score. While this number is important to get a mortgage approval, your debt to income ratio, or DTI ratio, is also critical. The debt to income ratio measures the size of your debt burden each month to the size of your gross monthly income. An analysis of your DTI ratio will help the lender to decide whether you can handle a mortgage.

According to analysis done by the Federal Reserve, excessive debt is the most common reason for mortgage loan denials, not credit score.

Are you worried if you have too much debt to get a mortgage? Below is more information about the debt to income ratio you need to get a home loan.

How to Calculate Your DTI Ratio

You can get your debt to income ratio by dividing your monthly debt payments, such as credit card payments, student loan payments and car payments, by your gross monthly income. When your mortgage lender runs that number, it will include your possible mortgage payment.

The debt to income ratio tells the lender how well you are managing debt. It also allows them to make a reliable prediction about if you will be able to pay your mortgage.

However, note that the DTI ratio does not consider how much you are paying for your other living expenses. Things such as groceries, car insurance payments and entertainment expenses are additional and not included in this number. Even if the DTI ratio shows you can afford a mortgage, you will need to figure out how that new expense fits into your budget.

Maximum DTI

As of 2018, the maximum DTI ratio that most mortgage holders can have is 43%. That is, if you want to take out a qualified mortgage. A QM is a loan with features that ensure the buyer can pay back the loan. QMs do not have fees above a certain amount, and they help borrowers to stay away from riskier loan products, such as negatively amortizing loans that can cause financial pain down the road.

Lenders want to lend you money if you have a low DTI ratio. Any ratio that is more than 43% suggests the buyer could be a higher risk. A person with a high DTI is judged as not being able to take on more debt. If the borrower does not pay on the mortgage, the lender could lose a lot.

However, a recent change by Fannie Mae is going to increase the maximum allowable DTI from 43% to 50%. This adjustment will apply to conventional loans which are not backed by the government. Fannie Mae decided to make this change because it found there were borrowers with debt to income ratios at 50% who were actually well qualified for getting a mortgage.

FHA-insured loans have their own rules for debt to income ratios. That said, just because you can have a DTI of 50% does not mean you should. The more money you have tied up into debt, the less money you can save and have available in case of an emergency.

Ideal DTI

43% is generally the highest DTI that a home buyer can have for a conventional mortgage, but buyers can be better off by having a lower ratio. Many financial experts say that best debt to income ratio for a home owner is 36% or below. Of course, the lower your DTI, the better. Borrowers with a low DTI have a better chance of qualifying for a mortgage with a low interest rate.

The Bottom Line

Mortgage lenders want their borrowers to have a relatively small amount of debt compared to their gross monthly income. If you want to qualify for a mortgage with a low interest rate, it is advised to keep your DTI below 36%. With a DTI in this range, you will have a better chance of getting a home loan with better terms.

If you have a lower credit score, say below 640, and a high amount of debt, you might consider the FHA loan instead of a conventional loan. This government backed loan allows you to carry a DTI as high as 50%.