What the debt-to-income ratio is
The Consumer Financial Protection Bureau defines it simply: your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income, before taxes and other deductions.
DTI = monthly debt payments ÷ gross monthly income
The CFPB’s own example: $1,500 of mortgage, $100 of car loan and $400 of other debts make $2,000 a month. On $6,000 of gross monthly income, the ratio is 33%.
Debts are loan payments: mortgage, car, student loans, minimum credit card payments, child support. Rent, utilities and groceries are not in the ratio, but they are in your budget.
How lenders use it, and why there is no single limit
Lenders use DTI as one way to measure whether you can manage a new payment. The CFPB is explicit that different loan products and lenders have different DTI limits, so there is no one number that applies to everyone.
That is why our house affordability calculator lets you type the limit. We use 36% in the examples below as a starting point, not a rule. The highest ratio a lender will approve and the ratio you can live with are different questions.
From DTI to a home price: the math
Work backwards from the ratio:
- Debt budget: $100,000 a year is $8,333.33 a month; 36% of it is $3,000.
- Housing budget: minus a $500 car payment, $2,500 a month is left for the house.
- Price: that $2,500 has to cover principal and interest on the loan, property tax and homeowners insurance.
Price = (housing payment − insurance + down payment × k) ÷ (k + tax rate ÷ 12)
Here k is the monthly payment for each dollar borrowed. With $60,000 down, 6.5% for 30 years, a 1.1% property tax and $1,800 a year of insurance, the price is about $377,105: a $317,105 loan, $2,004.32 of principal and interest, $345.68 of property tax and $150 of insurance a month.
How each number moves your budget
Same buyer, $100,000 of income, one change at a time, checked with the house affordability calculator:
| Change | Home price |
|---|---|
| Base case: $500 debts, $60,000 down, 6.5%, 36% | $377,105 |
| No car payment | $446,191 |
| 30% limit instead of 36% | $308,019 |
| Rate of 7.5% | $350,183 |
| Rate of 5.5% | $408,014 |
| $100,000 down | $412,039 |
Paying off a $500 car loan adds about $69,000 of home, more than $40,000 of extra down payment does. Every dollar of monthly debt competes directly with the mortgage.
Down payment, PMI and the 20% line
In the base case, $60,000 is 15.9% of the price. According to the CFPB, a conventional loan with less than 20% down usually requires private mortgage insurance (PMI). PMI protects the lender, not you, and it is usually a monthly premium added to your payment, shown on page 1 of your Loan Estimate.
PMI uses part of the same housing budget, so it lowers the price you can afford. Our affordability result does not include it; add it in the mortgage calculator once you have a quote. With $100,000 down, the buyer above crosses the 20% line.
What the ratio leaves out
DTI is a lender’s test, not a full budget. It does not count closing costs, HOA dues, repairs and maintenance, moving costs, or the savings you want to keep after closing. Your Loan Estimate lists the closing costs; get one from more than one lender and compare.
Before you shop, run three cases: the price at your chosen limit, the price with a rate one point higher, and the payment you would still be comfortable with if your income dropped. If all three work, the budget is solid.
Official sources
- Consumer Financial Protection Bureau: What is a debt-to-income ratio? · definition, example and lender limits
- Consumer Financial Protection Bureau: What is private mortgage insurance? · PMI with less than 20% down on a conventional loan
- Consumer Financial Protection Bureau: Loan Estimate explainer · closing costs on the Loan Estimate