How to Calculate Your Debt-to-Income Ratio When Applying for a Mortgage

Leave a Comment / Articles / By

Applying for a mortgage is one of the biggest financial moves most people will ever make. It’s exciting — but let’s be real — it can also be pretty nerve-wracking. One of the major factors lenders will size you up by is your debt-to-income ratio, often called your DTI.

This little number holds a lot of weight. It’s a key indicator of whether you can comfortably take on a mortgage and repay it over time.

In this guide, we’ll unpack everything you need to know about DTI: what it is, why it matters, how to calculate it, and what you can do to improve it before applying for a home loan.

What Exactly is the Debt-to-Income (DTI) Ratio?

Your DTI ratio measures the relationship between your monthly debt obligations and your gross monthly income.

It’s expressed as a percentage — and the lower the better.

Lenders use this ratio to predict how easily you’ll be able to cover your new mortgage repayments along with your existing debts like car loans, credit cards, and personal loans.

Why Do Lenders Care About Your DTI Ratio?

When a bank or lender assesses your mortgage application, they’re trying to answer one basic question:

“Can this person handle another loan without getting into financial trouble?”

A high DTI could suggest that you’re stretched too thin financially — making you a riskier borrower. On the flip side, a low DTI shows you’re managing your finances well and can likely afford to take on more debt.

Types of Debt-to-Income Ratios: Front-End vs. Back-End

When it comes to DTI, lenders usually look at two versions:

Front-End Ratio

Also called the housing ratio, this measures what percentage of your income would go towards housing costs only — including:

  • Mortgage principal and interest
  • Property taxes
  • Homeowners insurance
  • Body corporate fees (if applicable)

Back-End Ratio

The back-end ratio is more comprehensive. It measures your total monthly debt commitments — including housing costs plus:

  • Car loan repayments
  • Student loans
  • Credit card minimum payments
  • Personal loans
  • Any other debt commitments

How to Calculate Your Debt-to-Income Ratio (Step-by-Step)

Ready to crunch some numbers? Here’s a simple way to calculate your DTI:

Step 1: Work Out Your Gross Monthly Income

This is your income before taxes and deductions. Be sure to include:

  • Salary or wages
  • Commissions or bonuses
  • Rental income
  • Alimony or child support (if applicable)
  • Other reliable income streams

Example:

  • Annual salary: $72,000
  • Gross monthly income: $72,000 ÷ 12 = $6,000

Step 2: Add Up Your Monthly Debt Payments

List all your regular monthly debt repayments:

  • Current mortgage or rent
  • Car loans
  • Student loans
  • Credit card minimum payments
  • Personal loans
  • Any other installment debts

Example:

  • Rent: $1,200
  • Car loan: $350
  • Student loan: $250
  • Credit card minimums: $150

Total Monthly Debt Payments: $1,950

Step 3: Estimate Your New Mortgage Payment

If you’re planning to buy, estimate your expected mortgage repayment, including:

  • Principal
  • Interest
  • Property taxes
  • Homeowners insurance

Use an online mortgage calculator for a ballpark figure.

Example:

  • Estimated mortgage payment: $1,500

Step 4: Apply the Formulas

Front-End Ratio:

Back-End Ratio:

Step 5: Understand Your Results

Most lenders prefer:

  • Front-End Ratio: Below 28%
  • Back-End Ratio: Below 36% (sometimes up to 43% depending on loan type)

Why a Strong DTI Ratio Matters

1. Higher Chances of Loan Approval

A low DTI tells lenders you can handle your finances responsibly — which can tip the scales toward approval.

2. Better Interest Rates

Borrowers with stronger financial profiles often qualify for lower mortgage rates, saving thousands over the life of the loan.

3. Greater Financial Stability

Keeping your DTI in check isn’t just about getting approved — it’s about ensuring you stay comfortable financially even after your home purchase.

How to Improve Your DTI Ratio Before Applying

Boost Your Income

Raising your income can immediately lower your DTI percentage:

  • Ask for a raise or promotion
  • Start a side hustle or freelance gig
  • Rent out part of your property (if feasible)

Pay Down Debts

Reducing your debt load can have a huge impact:

  • Focus on wiping out high-interest debts first (credit cards, personal loans)
  • Consolidate debts to lower monthly payments
  • Refinance existing loans for better terms

Cut Unnecessary Spending

A solid budget will help free up cash to pay off debts:

  • Track every dollar for 1–2 months
  • Identify and eliminate “budget leaks” (unused subscriptions, takeaways, etc.)
  • Set realistic financial goals to stay motivated

Make Extra Debt Payments

Accelerate debt payoff by:

  • Making bi-weekly payments instead of monthly
  • Using tax refunds, bonuses, or side income for lump sum repayments

Tools to Help You Manage Your DTI Ratio

Online Calculators

Use DTI calculators to quickly work out where you stand and model different scenarios.

Personal Finance Apps

Apps like Pocketbook, YNAB (You Need A Budget), or MoneyBrilliant can help you track income, expenses, and debts with minimal fuss.

Professional Advice

Credit counselors or mortgage brokers can offer personalised strategies to lower your DTI and make you a more attractive borrower.

Other Mortgage Prep Tips to Maximise Your Approval Odds

Check Your Credit Report

Errors on your credit file can derail an otherwise strong application. Before applying:

  • Get your free credit report
  • Dispute any inaccuracies
  • Aim to boost your score if it’s below 700

Organise Your Financial Documents

Have these ready:

  • Recent pay slips
  • Last two years’ tax returns
  • Recent bank statements
  • Documentation of any rental or bonus income
  • A list of all debts and their minimum repayments

Get Pre-Approved

Pre-approval gives you:

  • A clear idea of your borrowing limit
  • Stronger negotiating power with sellers
  • Early detection of potential issues before you fall in love with a property

Consult a Mortgage Broker

Brokers can:

  • Shop around for competitive loan products
  • Help navigate tricky DTI scenarios
  • Offer advice on lender policies (some are more flexible than others)

Final Thoughts

Calculating your debt-to-income ratio is a non-negotiable first step when gearing up to buy a home.

Understanding where you stand — and taking action to improve it if needed — can make the difference between a smooth loan approval and a stressful scramble.

By focusing on paying down debt, boosting your income, and planning ahead, you’ll put yourself in the best possible position to land not just any mortgage — but the right mortgage for you.

Homeownership is a major milestone. Armed with knowledge, you can tackle the mortgage process with confidence and set yourself up for long-term financial success.