What Is a Debt-to-Income Ratio (DTI) & How Can You Improve It Before Applying for a Home Loan?

What Is a Debt-to-Income Ratio (DTI) — and How Can You Improve It Before Applying for a Home Loan?

Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. It plays a major role in whether you’re approved for a mortgage and how comfortable that payment will feel long-term.

Let’s break it down in real-world terms.

What exactly is DTI?

Your DTI is the percentage of your gross monthly income that goes toward monthly debt payments.

Lenders calculate it using this formula:

Total monthly debt payments ÷ gross monthly income = DTI

Monthly debts usually include:

• Credit cards (minimum payments)

• Auto loans

• Student loans

• Personal loans

• Existing housing payments (rent or mortgage)

• Any other reported installment or revolving debt

Not included:

• Groceries

• Utilities

• Gas

• Insurance that's not tied to a loan

• Subscriptions (unless financed)

Why does DTI matter so much?

DTI helps lenders answer one core question:

Can you comfortably afford this mortgage payment without financial strain?

A lower DTI generally means:

• Stronger approval odds

• Access to better loan options

• Less stress month-to-month after closing

A higher DTI doesn’t always mean denial but it can limit flexibility.

What DTI do lenders usually want to see?

This varies by loan program, but generally:

• Under ~36% → Very strong

• 37–43% → Common approval range

• 44–50%+ → Possible, but more restrictive

Some loan programs allow higher DTIs with strong compensating factors (excellent credit, reserves, or stable income), but lower is always safer.

How does DTI affect your buying power?

Two buyers can earn the same income and qualify for very different loan amounts based solely on DTI.

Example:

• Buyer A earns $7,000/month with $600 in debt

• Buyer B earns $7,000/month with $1,800 in debt

Even with identical credit scores, Buyer A can usually qualify for a higher monthly housing payment — and therefore a higher purchase price.

How can you improve your DTI before applying?

This is where strategy matters. Here are the most effective moves:

1. Pay down revolving balances (especially credit cards)

Even small reductions can meaningfully improve DTI because lenders use minimum payments, not balances.

2. Avoid new debt before and during the process

New auto loans, financed furniture, or “buy now, pay later” accounts can quickly raise DTI.

3. Increase income — if it’s stable and documentable

Overtime, bonuses, or a second job may count if they meet consistency guidelines.

4. Pay off smaller installment loans

Eliminating a $250/month payment can sometimes do more for approval than increasing income.

5. Don’t close accounts blindly

Closing a loan can help DTI, but closing credit cards can affect credit scores. Always ask before making changes.

Should you fix DTI before talking to a lender?

It definitely helps but it's not always necessary.

Many buyers assume they need to “clean everything up” first but a lender can help you prioritize what actually matters.

Sometimes:

• One small credit account payoff solves everything

• A loan restructure helps more than paying balances

• Your DTI is already acceptable and no changes are needed

A quick review can save months of unnecessary stress.

The bottom line

DTI isn’t about perfection it’s about balance.

Understanding how it works gives you leverage:

• You’ll know which moves matter

• You’ll avoid mistakes that slow approval

• You’ll feel more confident entering the process

If you’re unsure where you stand, a simple DTI review can clarify your next steps and help you move forward strategically.

For more info, join my email list.