What is a debt-to-income ratio? | Consumer Financial Protection Bureau (2024)

FAQs

What is a debt-to-income ratio? | Consumer Financial Protection Bureau? ›

Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.

Consider maintaining a debt-to- income ratio for all debts of 36 percent or less. Some lenders will go up to 43 percent or higher. Your home mortgage is included in this ratio. Consider maintaining a debt-to- income ratio for all debts of 15-20 percent or less.

Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it's the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.

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.

USDA Loan Eligibility

A minimum credit score of around 620 (credit score requirements might vary per borrower) A debt-to-income (DTI) ratio of 41% or less.

Lenders often use the 28/36 rule as a sign of a healthy DTI—meaning you won't spend more than 28% of your gross monthly income on mortgage payments and no more than 36% of your income on total debt payments (including a mortgage, student loans, car loans and credit card debt).

Most conventional loans allow for a DTI ratio of no more than 45 percent, but some lenders will accept ratios as high as 50 percent if the borrower has compensating factors, such as a savings account with a balance equal to six months' worth of housing expenses.

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.

To get the ratio as a percentage, you would then multiply 0.5 x 100 = 50%. Your DTI would be 50%. The ideal DTI varies by lender, type of loan and loan size. Generally, a DTI of 20% or less is considered low and at or below 43% is the rule of thumb for getting a qualified mortgage, according to the CFPB.

10% or less: Shouldn't have trouble getting loans. May qualify for lower rates. 11% to 20%: Again, shouldn't have trouble getting loans. Time to scale back on spending.

Does rent count in debt-to-income ratio? ›

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

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.

Backed by the federal government, Federal Housing Administration loans offer financing assistance to homebuyers with lower credit scores or smaller down payments. Most borrowers need a DTI of 43% or less to qualify for an FHA loan.

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.

USDA Loan Approval

The standard debt to income (DTI) ratios for the USDA home loan are 29%/41% of the gross monthly income of the applicants. The maximum DTI on a USDA loan is 34%/46% of the gross monthly income.

Therefore, a more precise way to determine how much you should spend would be to calculate what percent of your monthly gross income will be spent on housing costs. This is referred to as the "debt-to-income" ratio, or front-end DTI. The rule of thumb is that this number should be no more than 28%.

Section 1026.43(e)(2)(vi) provides that, to satisfy the requirements for a qualified mortgage under § 1026.43(e)(2), the ratio of the consumer's total monthly debt payments to total monthly income at the time of consummation cannot exceed 43 percent.

To maintain a low student loan repayment burden, the Consumer Financial Protection Bureau suggests student loan payments should not exceed 8% of your gross salary.