You’re about to apply for a mortgage. Do you know your DTI? No? Stop.
I’ve seen this happen dozens of times. Someone finds a house they love. They make an offer. The offer gets accepted. Then they go to the bank for a mortgage, and the lender says “your DTI is too high.” The deal falls apart. They lose the house. They lose their earnest money. They’re devastated.
I had a client – let’s call her Denise – who almost bought a house she couldn’t afford. She had a credit score of 720. She thought she was golden. She found a $350k house, made an offer, got accepted. Then the lender pulled her DTI. She had a car loan, student loans, and two credit cards with balances. Her DTI was 47%. The bank said no. She cried.
I asked her “did you calculate your DTI before you started looking?” She said “I didn’t know what DTI was.”
That’s not her fault. Nobody teaches this. So let me show you.
DTI stands for debt-to-income ratio. It’s your total monthly debt payments divided by your gross monthly income. Lenders use it to decide if you can afford another loan. For a conventional mortgage, they want your back-end DTI (all debts) under 43%. Some government loans go higher, but 43% is the magic number for most.
Here’s how to calculate it before you ever talk to a lender.
Add up all your monthly debt payments. Credit cards (minimum payments), car loans, student loans, personal loans, child support, alimony. Don’t include utilities, groceries, or insurance. Only debts that show up on your credit report.
Then divide that number by your gross monthly income (what you earn before taxes and deductions). Multiply by 100 to get a percentage.
Say you make $6,000 a month gross. Your debts total $2,400. That’s 40% – borderline but possible. If your debts total $2,700, that’s 45% – unlikely.
The DTI calculator does this for you in about 30 seconds.
Plug in your numbers. The tool will tell you if you’re in the green (under 36%), yellow (36-43%), or red (over 43%). That’s your starting point.
If you’re in the red, don’t apply for a loan yet. You’ll waste a hard inquiry on your credit report. Instead, make a plan to lower your DTI.
How do you lower DTI? Two levers. Increase income or decrease debt. Increasing income is harder – you’d need a raise, a second job, or a side gig. Decreasing debt is more straightforward. Pay something off.
Use the debt payoff calculator to see which debts to target first.
But here’s a trick for DTI specifically. Pay off the debts with the smallest monthly payments first. Why? Because your DTI is based on the payment amount, not the balance. A $500 credit card with a $50 minimum payment – pay it off, and your DTI drops by $50. A $10,000 car loan with a $300 minimum – pay that off, and your DTI drops by $300. Same effect on your DTI, but the car loan takes much longer.
So if you’re trying to qualify for a mortgage in the next 6-12 months, target the debts with the smallest monthly payments, regardless of interest rate. That’s the opposite of avalanche. But it’s the right move for DTI.
Someone I worked with – let’s call him Mike – had a $1,200 store card with a $40 minimum and a $12,000 car loan with a $350 minimum. He wanted to buy a house. His DTI was 44%. I told him to pay off the store card first. It took him two months. His DTI dropped to 42%. Then he qualified. If he had paid extra on the car loan, he’d still be waiting.
Now, what about student loans? Those are tricky. If you’re on an income-driven repayment plan, your monthly payment might be low. Lenders will use that payment for DTI. But if your payment is $0 under IBR, some lenders will still use 0.5-1% of the balance instead. So call a lender before you start – ask them how they calculate student loans.
Another thing. Don’t open new credit cards or take out new loans in the months before a mortgage application. Every new inquiry dings your score, and new debt increases your DTI. I’ve seen people buy a car six months before applying for a mortgage, thinking it’s fine. Then their DTI jumps 10 points and they no longer qualify. Don’t be that person.
The loan amortization schedule can help you plan if you already have a large loan.
Say you have a car loan with 24 months left. You want to buy a house in 10 months. If you pay extra on the car loan, you might pay it off before you apply for the mortgage. Then that $300 monthly payment disappears from your DTI. That’s a huge win. The amortization table shows you how much extra you’d need to pay to finish early.
I remember a woman named Lisa. She had a personal loan with 18 months left – payment $250. She wanted to buy a house in 9 months. I had her use the amortization schedule to see how much extra she’d need to pay each month to kill the loan in 8 months. It was an extra $150 a month. She cut her dining out and did it. When she applied for the mortgage, that $250 payment was gone. Her DTI dropped from 41% to 36%. She got approved.
So here’s your pre-loan checklist. Six to twelve months before you apply, pull your credit report. Check for errors. Dispute anything wrong. Then calculate your DTI. If it’s over 43%, make a plan. Target small monthly payments first. Pay off credit cards, close small loans, don’t add new debt. Also, avoid large purchases. Don’t finance a couch. Don’t lease a car. Keep your credit utilization low – under 30% on all cards.
Then, three months before you apply, stop using credit cards altogether. Pay with cash or debit. That keeps your utilization low and your DTI clean. Lenders will pull your credit again right before closing. If you’ve run up a card, they might cancel the loan.
I’m not trying to scare you. I’m trying to prepare you. DTI is one of the most underrated numbers in personal finance. People obsess over credit scores and ignore DTI. Then they wonder why they get rejected.
Don’t be that person. Check your DTI today. Use the calculator. Then you’ll know exactly where you stand.
P.S. Denise – the one who lost the house – she spent six months paying down her credit cards and her car loan. Her DTI dropped from 47% to 39%. She found another house and got approved. She closed last month. She sent me a photo of her keys. The caption: “Worth the wait.”
James, Austin
