Debt-to-income ratio (DTI)

Debt-to-income ratio is the percentage of a borrower's gross monthly income that goes to recurring monthly debt payments. Lenders calculate it two ways. The front-end DTI is just the proposed housing payment (PITI plus HOA) divided by gross monthly income. The back-end DTI is total monthly debt payments (the new mortgage plus car loans, student loans, credit-card minimums, child support, and other recurring debt) divided by gross monthly income.

How it works: the back-end ratio is usually the binding number in mortgage underwriting. Conforming conventional loans typically allow back-end ratios up to about 43%, with some flexibility above and below depending on credit profile, reserves, and other compensating factors. FHA can sometimes go higher. VA uses an additional residual-income test alongside DTI.

Why it matters: a buyer with $9,000 of gross monthly income and $400 of non-housing debts could in principle qualify for a housing payment around $3,470, that's the 43% back-end limit. A buyer with the same income but $1,000 of non-housing debts caps at about $2,870 in housing payment, a meaningful difference. DTI is the single most consequential underwriting metric for most borrowers, ahead of credit score.

Common gotcha: DTI uses gross income (before tax) and minimum monthly payments on debts, not actual cash flow. The lender's number can look different from the borrower's experience of their own finances. The lender's DTI is what determines qualification; the borrower's own assessment of comfortable monthly housing payment (usually a smaller number) is what determines whether the resulting loan is sustainable.