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Debt-to-Income (DTI) is a ratio that measures a borrower’s monthly debt payments relative to their monthly income. It’s one of the most important factors in loan qualification because it directly indicates a borrower’s capacity to take on additional debt and make consistent monthly payments. DTI is calculated by dividing total monthly debt obligations by total monthly qualifying income, expressed as a percentage. The numerator includes all recurring monthly debt payments the borrower is obligated to make, while the denominator includes all income sources that can be verified and are expected to continue for at least three years.

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Calculation

DTI = (Total Monthly Debt Payments) / (Total Monthly Income) × 100
The total monthly debt payments include the proposed mortgage payment (PITIA), all existing installment loans, revolving credit minimum payments, and other recurring obligations. The total monthly income includes all qualifying income sources that have been verified through documentation or automated verification systems.

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DTI limits and program requirements

Different loan programs establish different DTI thresholds based on risk tolerance and investor requirements. Conventional loans typically allow maximum DTI ratios of 43-50%, with the exact limit depending on credit score, down payment, and other compensating factors. Stronger credit profiles and larger down payments may allow for higher DTI ratios, while weaker profiles may require lower ratios. FHA loans are more flexible, allowing DTI ratios up to 57% in certain circumstances when compensating factors are present, such as significant cash reserves, excellent credit history, or stable employment. VA loans do not have a hard DTI limit but typically require ratios of 41% or less, with residual income requirements serving as an additional qualification metric. DSCR loans for investment properties focus on the property’s income-generating ability rather than the borrower’s personal DTI.

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Why DTI matters

DTI serves as a primary indicator of payment capacity and default risk. Lower DTI ratios demonstrate that a borrower has more disposable income available after meeting debt obligations, reducing the likelihood of payment default. Higher DTI ratios indicate greater financial strain and may require compensating factors such as excellent credit scores, substantial cash reserves, or stable employment history to offset the increased risk. Lenders use DTI in conjunction with credit scores, loan-to-value ratios, and other factors to make qualification decisions. Borrowers with DTI ratios near program maximums may face stricter underwriting requirements, higher interest rates, or may need to reduce debt or increase income to qualify.