The Homebuyer’s Corner
What Is a Debt-to-Income Ratio and How Does It Affect Your Mortgage Approval?
Written by Armando Novelo, NMLS 237243, a mortgage loan officer in West Covina with over 20 years of experience helping Southern California buyers.
Yes.
Your debt-to-income ratio, or DTI, is the percentage of your gross monthly income that goes toward monthly debt payments. Lenders use it to determine whether you can comfortably carry a mortgage payment on top of everything else you owe. It is one of the most important numbers in the approval process and the one most buyers understand least until they are sitting in front of a lender.
The formula is straightforward. Take all of your monthly debt obligations and divide them by your gross monthly income. If you earn $8,000 a month before taxes and your total monthly debts, including your future mortgage payment, come to $3,200, your DTI is 40 percent. That is the number lenders are working from.
What Counts as Monthly Debt
This is where buyers are most often surprised. Lenders include more than just your mortgage payment.
Monthly debts include your proposed housing payment, which covers principal, interest, property taxes, homeowners insurance, and any HOA dues. They also include every other minimum monthly obligation on your credit report: car payments, student loan payments, minimum credit card payments, personal loans, and any co-signed obligations.
What lenders do not count toward your DTI is almost as important to know. Groceries, utilities, gas, subscriptions, cell phone bills, insurance that is not tied to a financed debt, and any expense that does not show up as a monthly obligation on your credit report. Those affect your budget but they do not affect your DTI in underwriting.
The distinction matters because buyers often underestimate their DTI by mentally lumping all their expenses together. Your lender is not counting how much you spend at the grocery store. They are counting what you legally owe each month.
What the Thresholds Actually Mean
Different loan programs have different DTI limits and the limits are not as hard as most buyers assume.
A DTI below 36 percent is generally considered strong across all programs. You have meaningful room to carry a mortgage and still manage the rest of your financial life comfortably. Below 43 percent is the traditional guideline zone and where most conventional approvals land. Between 44 and 50 percent, you can still qualify on some programs but the list of eligible options narrows and lenders want to see compensating factors, a strong credit score, substantial reserves, or a larger down payment, to offset the higher ratio.
Above 50 percent, options become limited. Some FHA programs allow up to 57 percent in specific situations with strong compensating factors, but that is the ceiling for most buyers and not a comfortable place to be.
The DTI threshold also varies by loan type. FHA is generally more flexible than conventional on DTI. VA loans have no strict DTI cap but lenders still evaluate residual income, meaning the cash left over after all obligations are paid, as an additional measure. We covered how income qualification works across programs in this article.
Why Two Buyers With the Same Income Qualify for Very Different Loans
This is the concept that clicks everything into place for most buyers.
Take two buyers both earning $8,000 a month gross. Buyer A has a $450 car payment and $200 in student loan payments. Total non-housing debt: $650. At a 45 percent DTI, they have $2,950 available for a housing payment. At current rates on a $700,000 loan that is a tight but workable number.
Buyer B earns the same $8,000 but has a $650 car payment, $300 in student loans, and $250 in minimum credit card payments. Total non-housing debt: $1,200. At the same 45 percent DTI, only $2,400 is available for housing. That $550 difference in monthly room translates to roughly $80,000 to $90,000 less in purchasing power on a 30-year loan at current rates.
Same income. Same credit score. Different debt load. Different buying power. That is the DTI story in one example.
How to Actually Improve Your DTI Before Applying
The generic advice is to pay down debt. That is true but it is not specific enough to act on. Here is what actually moves the needle.
Paying off installment loans completely is the highest-impact move when the balance is low enough to eliminate. A $250 monthly car payment that is 8 months from payoff represents $2,000 left on the loan. Paying that off eliminates $250 from your DTI and can add roughly $35,000 to $40,000 in purchasing power at current rates. That is one of the best returns on a $2,000 deployment of cash you will find in the homebuying process.
Paying down credit card balances reduces your minimum payment obligation, but it has to be significant enough to actually lower the minimum. Dropping a $5,000 balance to $4,500 probably does not change your minimum payment. Dropping it from $5,000 to $1,000 likely does. Focus on accounts where a meaningful balance reduction actually changes the minimum payment calculation.
Adding documented income is the other lever but it has rules. Overtime, bonuses, and second-job income can be counted if you have a documented history, typically two years, of receiving it. A side hustle you started six months ago does not yet qualify under most guidelines regardless of how consistent it has been. Plan ahead if adding income is part of your strategy.
Do not close paid-off credit cards. Closing them can hurt your credit score by shortening your average account age and increasing your utilization ratio on remaining cards. Both of those can lower your score, which can affect your rate, which then affects your payment, which feeds back into your DTI. The goal is to improve the ratio without creating collateral damage elsewhere.
One Move Buyers Overlook
If you have debt that is close to being paid off, the timing of payoff can matter more than you might expect.
Mortgage lenders typically use the most recent statement balances and minimum payments they can verify. If a loan does not appear on your credit report because it was just paid off or if the balance has dropped to zero, it may not count against your DTI. Talk to your lender about which accounts are close enough to payoff that accelerating them could remove them from the DTI calculation entirely before your application goes in.
This is a strategy, not a magic trick. It requires available cash and the right timing. But it is real and it works. We covered the broader relationship between credit and mortgage qualification in this article.
When to Talk to a Lender About Your DTI
Before you make any significant financial move to improve your DTI, talk to your lender first.
I have had clients pay off the wrong debt, close accounts they should have kept, or spend cash on payoffs that then left them short on the down payment. Every one of those situations could have been avoided with a 15-minute conversation before the money moved.
A lender can look at your specific file, identify which debts are actually affecting your DTI and by how much, and tell you exactly what to pay off to achieve the result you are looking for. Guessing is almost always more expensive than asking.
If you are in the San Gabriel Valley and you are not sure where your DTI stands or what it would take to get it where it needs to be, that conversation is worth having well before you think you are ready to buy. Buyers who start that conversation early have options. Buyers who start it in escrow have pressure.
Armando Novelo, NMLS 237243, is a mortgage loan officer at Super Mortgage Bros, powered by Golden Empire Mortgage. He has been helping Southern California buyers and homeowners since 2002. His office is located in West Covina, CA.
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Article Published: June 25, 2026
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Armando Novelo
NMLS 237243
Super Mortgage Bros
1900 W. Garvey Ave S. #100
West Covina, CA 91790
Phone: (626) 200-1838
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