What is a Good Debt-to-Income Ratio to Buy a House?

Buying a home is a huge milestone, yet it can be difficult to determine how much to borrow. Online mortgage calculators can estimate affordability. But to know what you can actually afford, you’ll need to get pre-approved for a mortgage.

Typically, a monthly mortgage payment should be no more than 28% to 31% of your gross income with a conventional and FHA loan, respectively. But even if you find a property that keeps your payment within these percentages, your debt-to-income ratio ultimately decides how much you’re able to borrow.

What Is the Debt-to-Income Ratio?

Debt-to-income ratio, or simply DTI, refers to the percentage of your monthly income that goes toward debt payments.

When applying for a mortgage, you’ll authorize a credit check where lenders examine your credit history, including your current debts and the minimum monthly payments for these debts.

They’ll calculate your total monthly debt payments, and then divide this by your gross income to determine your DTI ratio. So, if you have a gross monthly income of $5,000, and $500 in monthly debt payments, you have a DTI ratio of 10%—which is excellent.

But mortgage lenders don’t only look at your current debts when calculating DTI ratio. They also factor in “future” mortgage payments to gauge affordability.

So, if you’re thinking about buying a property with an estimated monthly payment of $1,300, you’ll have future monthly debt payments of $1,800. Assuming the same gross monthly income of $5,000, your DTI ratio increases to 36% after buying a home.

A good debt-to-income ratio to buy a house depends on your mortgage program. If you apply for a conventional home loan, your ideal DTI ratio should be 36% or less. On the other hand, if you’re looking at an FHA home loan, these programs may allow DTI ratios up to 43%.

To be clear, though, these are only guidelines, and not hard or fast rules. Lenders sometimes allow higher DTI ratios, such as when a borrower has certain compensating factors.

One compensating factor is a high credit score, perhaps a score in the high 700 to 800 range. A superb score indicates a history of responsible credit use, so you’re not likely to get into a mortgage you can’t afford.

In addition, you might be able to purchase with a higher DTI ratio if you’ll maintain a large cash reserve after paying mortgage expenses—perhaps several months of mortgage payments in savings.

How to Improve Your Debt-to-Income Ratio

Unfortunately, some people run into DTI ratio problems when applying for a mortgage.

They fall in love with a house, but when their lender crunches the numbers, the monthly payment is more than they can afford on paper.

If you’re having trouble meeting the DTI requirements for your proposed mortgage, consider bringing more income to the table. To do this, look into adding a co-borrower on the mortgage application.

Some couples only put one person’s name on a mortgage loan. Yet, adding the other person as a co-borrower allows lenders to use both incomes for qualifying purposes. Only do this, however, if the other person has a good credit score, too.

When one mortgage applicant has a high score and the other has a low score, lenders may use the lower of the two scores to determine the mortgage rate.

You can also pay off debts to decrease your DTI ratio. A car loan or a student loan can push up your debt-to-income ratio and limit purchasing power. So if you’re thinking about buying a home, accelerate paying off these and other debts, such as credit cards.

Bottom Line

Whether you’re buying a starter home or you’re a repeat buyer, it’s important to get a property you can actually afford. This results in a more positive home buying experience and reduces the likelihood of payment problems.

If you’re ready to apply for a loan, contact the loan experts at Blue Spot Home Loans. We can help you find a mortgage program that’s right for your situation.