What is a good debt-to-income ratio for a mortgage? Monthly debt divided by gross monthly income, in two versions: the housing payment alone, and every monthly debt together. The second is what most approvals turn on.
Debt-to-income ratio is monthly obligations over gross monthly income, before tax. Lenders compute two of them. The front-end or housing ratio uses the proposed housing payment on its own: principal, interest, property taxes, homeowners insurance, mortgage insurance and any HOA dues. The back-end ratio adds every other monthly payment in the file. Back-end is the one that decides most loans, and front-end is looked at mainly when the back-end is close to a limit.
There is no single good number, only program ceilings, and they move. The agencies' automated underwriting systems approve back-end ratios up to 50 percent on files where credit, reserves and down payment carry the extra room; around 45 percent is a common ceiling on a manually underwritten conventional loan; 43 percent is the figure most often quoted because it was the general qualified mortgage limit before that rule was rewritten in 2021 around a price-based test instead. FHA tolerates higher ratios again where the automated system approves the file or an underwriter documents compensating factors such as reserves or a long history at the same housing payment. The number that matters is the one the lender's system returned on this file.
What counts as debt is narrower than a household budget. Credit card minimums, instalment and car loans, leases, personal loans, child support and alimony, a student loan payment (a percentage of the balance, commonly between half a percent and one percent, where the reported payment is zero or the loan is deferred), and the full housing payment on the new home including HOA dues. Utilities, phone, groceries, childcare, car insurance and homeowners insurance outside the housing payment do not count. In the valley the HOA line is the one people forget, and in a master-planned community it is often the difference between two ratios either side of a ceiling.
A worked example
On $8,000 of gross monthly income, a $360,000 loan at 6.5 percent is $2,275 of principal and interest, plus about $225 of property tax and $131 of insurance at the calculator's defaults and $50 of HOA dues: $2,681, a front-end ratio of 33.5 percent. Add a $450 car payment, a $180 student loan payment and $90 of card minimums and the back-end ratio is 42.5 percent. At a 45 percent ceiling that income supports about $2,880 of housing payment with those debts in place.
Price a payment against an income
Questions people ask
Does debt-to-income use gross or net income?
Gross, before tax and deductions, for a salaried borrower. Self-employment income is different: it is taken from the tax returns after business expenses, usually averaged over two years, so the figure a lender uses can be well below what the business banked.
Do you have to pay off a car loan to qualify for a mortgage?
Not necessarily. The payment counts against the ratio while it exists, and some programmes disregard an instalment loan with fewer than ten payments left. Whether closing it helps depends on where the ratio sits against the ceiling the lender is working to.