Debt-to-Income Ratio (DTI) is the percentage of your monthly gross income that goes to debt payments — including the proposed new debt. Mortgage lenders typically cap DTI at 43% (front-end housing) or 36% (back-end including all debts).
DTI is one of the core underwriting metrics for mortgages, auto loans, and personal loans. The formula: total monthly debt payments / total monthly gross income. A $5,000/month income with $1,500/month in debt payments (including the proposed new loan) is 30% DTI. Mortgages use two DTI ratios. Front-end DTI = housing payment / gross income (typically capped at 28-31%). Back-end DTI = total debt payments / gross income (typically capped at 36-43%). Qualified Mortgages (QM) under federal CFPB rules cap back-end DTI at 43% for most loans. What counts as debt: credit card minimum payments (not full balances), auto loan, student loan, other mortgage, child support, alimony. What doesn't count: utilities, groceries, healthcare premiums, retirement contributions, taxes. DTI changes with the proposed new debt. When applying for a mortgage, the lender adds the projected mortgage payment (principal + interest + taxes + insurance) into the back-end DTI calculation. This is why paying down credit cards before applying matters — it reduces minimum payments and thus DTI. The CFPB's Ability-to-Repay and Qualified Mortgage rule (12 CFR Part 1026, https://www.consumerfinance.gov/rules-policy/regulations/1026/) establishes the 43% DTI ceiling for Qualified Mortgages. The CFPB's home buying guide (https://www.consumerfinance.gov/owning-a-home/) explains how DTI affects mortgage approval and what steps borrowers can take to improve it.
Under 36% back-end DTI is comfortable for most lenders. 36-43% is the standard QM range. Above 43% can disqualify you from QM loans, though non-QM loans accept higher DTI at higher rates. FHA loans accept up to 50% DTI with compensating factors.
Pay down credit cards to reduce monthly minimums (highest leverage; can drop 100+ bps of DTI quickly). Pay off small installment loans (auto, personal). Avoid taking on new debt 6-12 months before applying. Don't reduce income — lenders use 24-month income averages, so a recent drop hurts.