Debt to Income Ratios - Pivot Lending Group (2024)

FAQs

What is a good debt-to-income ratio for lenders? ›

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

Borrowers must have a minimum credit score of 580 to qualify for the loan. The maximum DTI for FHA loans is 57%. However, a lender can set their own requirement. This means some lenders may stick to the maximum DTI of 57%, while others may set the limit closer to 40%.

Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

DTI is one factor that can help lenders decide whether you can repay the money you have borrowed or take on more debt. A good debt-to-income ratio is below 43%, and many lenders prefer 36% or below. Learn more about how debt-to-income ratio is calculated and how you can improve yours.

According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.

For FHA and VA loans, the DTI ratio limits are generally higher than those for conventional mortgages. For example, lenders may allow a DTI ratio of up to 55% for an FHA and VA mortgage. However, this can vary depending on the lender and other factors.

Pay Down Debt

Paying down debt is the most straightforward way to reduce your DTI. The fewer debts you owe, the lower your debt-to-income ratio will be. Suppose that you have a car loan with a monthly payment of $500. You can begin paying an extra $250 toward the principal each month to pay off the vehicle sooner.

FHA guidelines for DTI ratios vary depending on credit score and other financial considerations, such as cash on hand. The highest DTI allowed is 50 percent if the borrower has a credit score of 580 or higher. Depending on the lender, other qualifications could also be required.

These are some examples of payments included in debt-to-income: Monthly mortgage payments (or rent) Monthly expense for real estate taxes.

What is a bad debt-to-income ratio? ›

Key takeaways

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

Monthly Payments Not Included in the Debt-to-Income Formula

Many of your monthly bills aren't included in your debt-to-income ratio because they're not debts. These typically include common household expenses such as: Utilities (garbage, electricity, cell phone/landline, gas, water) Cable and internet.

Consistently paying off your credit card on time every month is one step toward improving your credit scores. However, credit scores are calculated at different times, so if your score is calculated on a day you have a high balance, this could affect your score even if you pay off the balance in full the next day.

Rent is an expense of living which is normally paid monthly on the first day of the month. If you haven't paid your rent by the second day of the month, it would be considered a debt.

It does not include health insurance, auto insurance, gas, utilities, cell phone, cable, groceries, or other non-recurring life expenses. The debts evaluated are: Any/all car, credit card, student, mortgage and/or other installment loan payments.

Your particular ratio in addition to your overall monthly income and debt, and credit rating are weighed when you apply for a new credit account. Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.

Wells Fargo, for instance, classifies DTI of 35% or lower as “manageable,” since you “most likely have money left over for saving or spending after you've paid your bills.” 36% to 43%: You may be managing your debt adequately, but you're at risk of coming up short if your financial situation changes.

To determine how much you can afford using this rule, multiply your monthly gross income by 28%. For example, if you make $10,000 every month, multiply $10,000 by 0.28 to get $2,800. Using these figures, your monthly mortgage payment should be no more than $2,800.

If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low. However, what constitutes a “good debt ratio” can vary depending on industry norms, business objectives, and economic conditions.