March is National Credit Education Month, a perfect time to focus on the financial factors that influence mortgage approval. One of the most important is your debt-to-income ratio, or DTI.
If you are planning to buy a home this year, understanding this number can help you avoid surprises during the approval process.
What Is Debt-to-Income Ratio?
Your debt-to-income ratio is the percentage of your gross monthly income (before taxes and deductions) that goes toward paying monthly debts. Lenders use this percentage to assess whether you can reasonably afford a mortgage payment. According to the 2025 Generational Trends Report from the National Association of REALTORS®, 40% of prospective buyers who were denied a mortgage cited their debt-to-income ratio as the reason.
What Ratios Do Lenders Prefer?
Lenders commonly follow what is known as the 28/36 guideline:
- 28% (front-end ratio): Housing costs alone generally should not exceed 28% of your gross monthly income.
- 36% (back-end ratio): When all recurring debts are included, such as minimum credit card payments, auto loans, student loans and other installment obligations, lenders typically look for a total ratio at or below 36%.
According to US Bank, a good DTI is generally 36% or less, and 43% is often the maximum for qualified mortgages. In most underwriting scenarios, DTI ranges are interpreted as follows:
- Under 36%: Ideal and shows manageable debt.
- 37 to 43%: Generally acceptable, but may receive closer review.
- Above 43%: Higher risk and may limit mortgage options.
Some programs, such as FHA loans, like the NC home Advantage Mortgage™, may allow higher ratios, but approval can become more difficult as DTI increases.
Understanding how lenders calculate DTI allows prospective home buyers to assess mortgage readiness before submitting an application.
How Can You Calculate Your DTI?
You can calculate your DTI in four steps:
Step 1: Divide your total annual income before taxes by 12 to calculate your gross monthly income.
Step 2: Add your total monthly debt payments, including housing, credit cards, student loans, auto loans and any other recurring obligations.
Step 3: Divide total debt by gross monthly income.
Step 4: Multiply by 100.
Example:
$1,500 in monthly debt ÷ $5,000 gross monthly income = 0.30
0.30 × 100 = 30% DTI
How Can You Improve Your DTI?
If your DTI is higher than recommended, you can:
- Pay down credit card balances.
- Avoid opening new lines of credit.
- Increase your income if possible.
- Delay applying for a mortgage until your ratio improves.
Even small adjustments can lower your DTI and strengthen your mortgage application.
National Credit Education Month provides an opportunity to review the financial indicators that influence mortgage readiness. Understanding your debt-to-income ratio is an important step, but working with knowledgeable professionals can also make a difference. Prospective home buyers can visit our website to connect with a participating lender who can review individual circumstances, explain available loan options and help determine next steps.