What Debt Is Considered When Getting A Mortgage?

When it comes time to buy a home, how much debt you have will affect your ability to get a mortgage. But what debt is considered when you’re applying for a mortgage? How much is too much debt? The answers depend on the type of debt you have and how much of your income the payments take up. Here’s a closer look at what counts as debt when you apply for a mortgage.

Key Takeaways:

What Is Debt-To-Income Ratio?

A debt-to-income ratio compares your monthly debt payments to your gross income, which is what you earn before taxes are taken out. Lenders use your DTI ratio to determine whether you have enough income to afford the mortgage payment.

There are two DTI ratio calculations lenders consider, depending on the type of loan you’re applying for: a front-end DTI ratio and a back-end DTI ratio.

Calculating Your Front-End DTI Ratio

A front-end DTI ratio or housing expense ratio compares how much you spend on housing each month with your income. Housing expenses include rent, monthly mortgage payments, property taxes, homeowners insurance and homeowners association fees. Front-end DTI ratios are used for certain loan types, such as FHA loans.

Here’s the formula to calculate your front-end DTI ratio:

Front-end DTI ratio = (Monthly housing expenses​ / Gross monthly income) x 100

Calculating Your Back-End DTI Ratio

Your back-end DTI ratio includes your housing expenses as well as your monthly debt payments, including loan and credit card payments. No matter what kind of mortgage you’re getting, a back-end DTI ratio is calculated. This is the number most lenders will take into consideration.

Back-End DTI Ratio = (Total monthly debt expenses / Gross monthly income) x 100

Debt-To-Income Ratio Calculation Example

Let’s see how these formulas work in practice by going through a quick example.

John Doe has an income of $72,000 per year before taxes. His mortgage payment is $1,400 per month. He also has a car payment of $400 per month, credit card balances with minimum payments totaling $300, and a $600 monthly personal loan payment.

Let’s first take a look at John’s housing expense ratio. The two key numbers in this calculation are John’s mortgage payment of $1,400 and his monthly income of $6,000. His housing expense ratio is a little more than 23%:

($1,400 / $6,000) x  100 = 23%

As a reminder, a back-end DTI ratio considers all a person’s debts, not just housing expenses. If we include all his debts, we get a back-end DTI ratio of 45%.

($2,700 / $6,000) x 100 = 45%

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What Debts Are Included In Debt-To-Income Ratio?

Not every bill you pay is counted as debt. Typically, DTI ratios only include loans and credit accounts. The easiest way to think about this is if it shows up on your credit report, it can be included in your DTI ratio.

Here’s a list of bills that count as debt when calculating your DTI ratio:

What Debts Are Not Included In Debt-To-Income Ratio?

The following expenses are not included in your DTI ratio calculation:

Though certain bills don’t show up on your credit report and aren’t included in your DTI ratio, it’s still important to stay current on these accounts. They may show up on your credit report and hurt your score if you have a late payment or the account goes to collection.

Special Considerations For Your DTI Ratio Calculation

If you’re getting a mortgage, your DTI ratio calculation will use the actual monthly payment amount for certain types of debt, such as:

However, some categories of debt have particular guidelines when it comes to a DTI ratio calculation.

Student Loans

If you’re repaying student loans, the monthly payment will be included in your back-end DTI ratio.

If your student loans are in deferment or forbearance, the lender will factor your student debts into your DTI ratio in different ways.

If you’re getting a conventional loan, Fannie Mae requires lenders to use either the monthly payment or an amount equal to 1% of the outstanding loan balance in calculating your DTI ratio. Freddie Mac requires lenders to use an amount equal to 0.5% of the loan balance.

In some cases, student loan debt can be excluded completely from your DTI ratio. For example, if you have 10 or fewer monthly payments left, it can be left out.

Other loan programs have their own rules about how student loan debt is factored into your DTI ratio.

Alimony Or Child Support

If you’re taking out a conventional loan and paying alimony or child support, this could affect the amount of debt included in your DTI ratio.

If you’re taking out a conventional loan and have more than 10 monthly child support payments remaining, the monthly payment amount will be included as debt in your DTI ratio.

Alimony payments, on the other hand, are deducted from your income instead of counted as a debt, which could help you qualify for a mortgage more easily.

What’s Considered A Good Debt-To-Income Ratio?

As a general rule, you’ll want a DTI ratio at or below 36% to qualify for the most loan options possible. With that said, the exact limits will depend on your other qualifications and the type of loan you’re trying to get. Every lender has its own eligibility requirements.

Conventional Loan DTI Ratio

If you’re applying for a conventional loan through Fannie Mae’s automated underwriting system, you can have a DTI ratio as high as 50%. (Freddie Mac’s Loan Product Advisor has its own criteria, not a specific maximum.) As you get closer to the higher end of that ratio range, it’ll sometimes be easier to qualify if you have a lower housing expense ratio on the front end. If your loan is manually underwritten, the DTI ratio limit is reduced to 36% to 45% in cases where credit requirements are met.

Another factor Fannie Mae specifically looks at is your credit card behavior. If you pay off most or all of your balance each month, you’re considered a lower lending risk than someone who pays only the minimum.

FHA Loan DTI Ratio

An FHA loan is a mortgage issued by a private lender and insured by the Federal Housing Administration. As a result, these loans allow for lower credit scores than conventional loans. To be eligible for most FHA loans, your DTI ratio cannot exceed 43%. In addition, your mortgage payment cannot exceed 31% of your gross monthly income.

VA Loan DTI Ratio

A VA loan is issued by a private lender and backed by Veterans Affairs. VA loans are only available to eligible military service members, veterans and their surviving spouses. Your DTI ratio typically cannot exceed 41% to qualify for a VA loan. However, there can be exceptions if your DTI ratio is higher due to tax-free income, and this residual income surpasses the acceptable limit by around 20%.

Jumbo Loan DTI Ratio

Jumbo loans are mortgages that exceed conforming loan limits. For 2024, that limit is $766,550 in most areas and $1,149,825 in high-cost areas. Many lenders require that your DTI ratio not exceed 45% to qualify for a jumbo loan.

What Do You Qualify For With Your DTI Ratio?

Your DTI ratio is used to help you qualify for several different financial moves, such as:

How To Lower Your DTI Ratio

If your DTI ratio is higher than you’d like, here are some ways you can reduce it:

FAQ

Here are answers to some frequently asked questions about debt and getting a mortgage.

The Bottom Line

Mortgage lenders look at your existing debt and DTI ratio when determining your eligibility for a home loan, so it’s important to understand how debt is factored into your mortgage. If your DTI ratio is higher than you’d like, there are steps you can take to lower it, which should help you qualify for a mortgage more easily and get a competitive interest rate.

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