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Are you unsure what your monthly mortgage payments will be? We offer an advanced mortgage payment calculator to figure monthhly housing expenses. Below the calculator on this page we also publish current San Diego mortgage rates, so you can use real market data to ensure your calclations are accurate.
Use this calculator to quickly determine both of your debt to income ratios. A table underneath the calculator highlights DTI loan limits for conventional, FHA, VA & USDA loans.
Frontend & Backend Debt Ratio Calculator
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We publish DTI loan limits for conventional, FHA, VA & USDA loans. You can also use our free tools to calculate monthly payments and lock-in San Diego's low mortgage rates and save.
Current San Diego 30-YR Fixed Mortgage Rates
The following table highlights current San Diego mortgage rates. By default 30-year purchase loans are displayed. Clicking on the refinance button switches loans to refinance. Other loan adjustment options including price, down payment, home location, credit score, term & ARM options are available for selection in the filters area at the top of the table.
Debt-to-Income Ratio: Improving Your Financial Profile
Making major life purchases such as a house comes with a hefty price. To afford the expensive cost, most people typically apply for financing to buy a house. This costs a large portion of your income and takes many years to pay back.
But of course, before you borrow a large amount money, it’s important to know if you can afford to pay it back. This is exactly what lenders do when they evaluate your mortgage application. Lenders enforce strict qualifying standards when it comes to checking your credit profile. And one of the most important factors lenders assess is your debt-to-income ratio.
Our article will explain what debt-to-income ratio (DTI) is and how it’s used to measure creditworthiness. We’ll discuss the two main types of DTI ratios, front-end DTI and back-end DTI, and how to calculate each one, as well as specific DTI requirements for different types of mortgages. Then, we’ll rundown different strategies that can improve your DTI ratio and your overall credit profile.
What is Debt-to-Income Ratio (DTI)?
DTI ratio is a percentage that signifies the total amount of monthly debts you owe in comparison to your gross monthly income. It’s essentially a measurement of how much of your salary goes toward paying debt obligations. As a rule of thumb, it’s important to earn more than you spend to maintain a healthy credit profile.
Lenders consider your DTI ratio as a primary factor for gauging creditworthiness or your ability to repay a loan. They check if you have a reliable income stream for consistent mortgage payments. This includes making sure your finances are not overleveraged by large debts. Lenders also evaluate DTI to determine the amount they are willing to loan.
According to the Consumer Finance Protection Bureau (CFPB), studies suggest that borrowers with high DTI ratios are more likely to have problems making monthly payments. As such, to obtain a qualified mortgage, borrowers are required to have a back-end DTI ratio of no more than 43%.
When you have less debts and lower DTI ratio, you pose lower default risk to lenders. It means you have enough money to cover monthly mortgage payments. On the other hand, a higher DTI ratio means you are not in a good financial position to accumulate more debt. Thus, you have greater risk of missing mortgage payments and defaulting on your loan. If such is the case, your mortgage application might not be approved. And if you do get approved, you’re likely given a higher rate. Obtaining a lower rate, on the other hand, results in significant interest savings.
Not a Full Measure of Affordability
While DTI measures income relative to your debts, it is not a full indicator of mortgage affordability. Though it includes recurring payments such as monthly mortgage, credit card bills, car loan payments, and other debts, it does not cover other essential costs. Things like food, utilities, gas, insurance, and other discretionary expenses take up a significant portion of your income. For this reason, it’s much safer to maintain a lower DTI ratio than the limit your lender may require.
Changes in Mortgage Regulations
In June 2020, the CFPB announced they were taking steps to tackle GSE patches, proposing to remove DTI ratio as a primary factor for qualifying mortgages. In its place would be a price-based approach for assessing loans, which is a strong indicator for measuring a borrower’s ability to repay their mortgage. Below is an excerpt from the official announcement:
“[T]he Bureau proposes to amend the General QM definition in Regulation Z to replace the DTI limit with a price-based approach. The Bureau is proposing a price-based approach because it preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone.
For eligibility for QM status under the General QM definition, the Bureau is proposing a price threshold for most loans as well as higher price thresholds for smaller loans, which is particularly important for manufactured housing and for minority consumers. The NPRM also proposes that lenders take into account a consumer’s income, debt, and DTI ratio or residual income and verify the consumer’s income and debts.”
Two Main Types of DTI Ratios
DTI ratios come in two primary types: front-end DTI ratio and back-end DTI ratio. Depending on the type of loan you get, lenders require specific DTI ratios for different kinds of mortgages.
Front-end DTI Ratio
Front-end DTI ratio refers to the percentage of your housing-related costs in relation to your gross monthly income. This includes monthly mortgage payments or rent, property taxes, homeowner’s insurance, etc. Most conventional lenders prefer a front-end DTI ratio no higher than 28%.
Included costs under front-end DTI:
- Mortgage payment or rent payment
- Property taxes
- Homeowner’s insurance
- Homeowner’s association (HOA) fees
- Other essential housing-related expenses
You can calculate front-end DTI ratio by taking your total monthly housing expenses and dividing it by your gross monthly income. To get the percentage, multiply the quotient by 100. Here’s the basic formula below:
Front-end DTI = (Housing Expenses / Gross Monthly Income) * 100
For example, let’s assume your gross monthly income is $6,500. The following table breaks down your monthly housing expenses and shows your resulting front-end DTI ratio.
| Front-end Ratio Details | Amount |
|---|---|
| Gross Monthly Income | $6,500 |
| Housing Costs: | |
| Mortgage Payment | $1,200 |
| Property Taxes | $300 |
| Homeowner’s Insurance | $150 |
| HOA Fees | $100 |
| Total Monthly Housing Costs | $1,750 |
| Front-end Ratio | 26.92% |
Front-end DTI = ($1,750 / $6,500) * 100
= 0.269230769 * 100
=26.92%
Based on this example, the front-end DTI is 26.92%. It’s slightly below the recommended front-end limit, which is 28%.
Back-end DTI Ratio
Back-end DTI ratio includes your housing-related costs together with the rest of your loan obligations, such as credit card debts, car loans, personal loans, etc. As a rule, conventional loan lenders prefer borrowers with a back-end DTI ratio no more than 36%. But depending on your financial profile, they may accept up to 43%. If you have compensating factors such as a student loan, some lenders may allow up to 50%.
Included costs under back-end DTI:
- All expenses under your front-end ratio (housing costs)
- Auto loan payments
- Credit card payments
- Student loan payments
- Personal loan payments
- Alimony and child support payments
To estimate your back-end DTI ratio, take the sum of all your monthly debts and divide it by your gross monthly income. To obtain the percentage, multiply the quotient by 100.
Back-end DTI ratio = (Total Monthly Debts / Gross Monthly Income) * 100
Here’s an example. Presuming your gross monthly income is $6,500, let’s calculate your back-end DTI ratio using the following financial details. See the table and the results below.
| Back-end Ratio Details | Amount |
|---|---|
| Gross Monthly Income | $6,500 |
| Front-end Costs: | |
| Mortgage Payment | $1,200 |
| Property Taxes | $300 |
| Homeowner’s Insurance | $150 |
| HOA Fees | $100 |
| Subtotal of Front-end costs | $1,750 |
| Back-end Costs (Debts): | |
| Credit Card Payment | $50 |
| Car Loan Payment | $350 |
| Student Loan Payment | $150 |
| Total Monthly Front-end & Back-end Debt Payments | $2,300 |
| Back-end Ratio | 35.38% |
Back-end DTI = ($2,300 / $6,500) * 100
= 0.353846154 * 100
= 35.38%
In this example, the back-end DTI ratio is 35.38%. This is slightly lower than the preferred back-end DTI ratio limit, which is 36%.
Lower DTI Means More Favorable Rates
If you want a more competitive rate, aim to reduce your back-end DTI ratio. Generally speaking, the back-end ratio is typically more significant. While lenders check front-end DTI, they place greater importance on back-end DTI because it encompasses all your debts, not just housing-related expenses. Thus, if you have a high back-end DTI ratio, it’s worth improving it before taking a mortgage. On the other hand, borrowers with a back-end DTI of over 40% receive higher interest rates and are usually required to pay a large down payment.
DTI Limits for Different Types of Mortgages
The following chart shows specified DTI limits for different types of mortgages. It includes conventional mortgages and government-backed loans such as FHA loans, VA loans, and USDA loans.
| Loan Type | Front-end | Back-end | Hard Limit | Notes |
|---|---|---|---|---|
| Recommended | 28% | 36% | n/a | Ideal borrower, obtains great APR. Higher DTI usually means a higher rate. |
| Conventional | 28% | 36% to 43% | 45% to 50% | Each lender is approved based on a variety of factors such as credit score, income & assets, credit history, etc. |
| FHA | 31% | 43% | 57% | Requires compensating factors to get approved with high DTI. Ex. If your DTI is over 43%, the lender might require a higher down payment. |
| VA | most lenders refer to the back-end DTI ratio | 41% | ~ 47% | Each lender decides based on a variety of factors for each veteran. Lenders have to explain why they approve any loan above a 41% limit. Basic housing & sustenance allowance count toward qualifying. |
| USDA | 29% – 32% | 41% | 41% | Loans that cater to borrowers in rural markets with incomes below 115% of the local median income. See more details here. |
The soft back-end limits may allow approval using automated underwriting software. Meanwhile, the hard limits usually require manual approval and other compensating factors, such as a high credit score or perhaps a co-signer for mortgage approval. Government-backed mortgages also tend to have lenient DTI limits compared to conventional loans. If you have low income and considerable debts, obtaining a government loan might be a good fit for you.
To increase income and improve DTI ratio, borrowers apply for a mortgage together with their spouse. When the lender evaluates your DTI ratio, it combines your spouse’s monthly income and debt obligations.
If Your Spouse Has Unsatisfactory Credit
Sometimes your wife or husband might have a poor credit record. If that is the case, it’s better to apply for the mortgage individually. A partner with a bad credit history is seen by lenders as a liability, which imposes higher credit risk. If your mortgage is approved, you’ll receive a much higher interest rate. Thus, talk to your partner and review your credit records. If you find that one of you has inadequate credit, it’s wiser to have one person to secure the mortgage.
Estimating your DTI Ratio with Your Spouse
Using the above calculator, you can determine your DTI ratios before you apply for a mortgage with your spouse. For example, let’s say your gross monthly income is $6,500 while your spouse’s monthly income is $4,500 after taxes. The following table details your housing expenses and other debt payments, as well as your estimated front-end and back-end DTI ratios.
| DTI Ratio Details | Amount |
|---|---|
| Your Monthly Gross Income | $6,500 |
| Your Spouse’s Monthly Income After Taxes | $4,500 |
| Total Monthly Income | $11,000 |
| Front-end Costs (Housing): | |
| Monthly Mortgage Payment | $1,800 |
| Annual Property Taxes | $2,500 ($208.33 per month) |
| Annual Homeowner’s Insurance | $1,200 ($100 per month) |
| Monthly HOA Fees | $150 |
| Total Front-end Expenses | $2,258.33 |
| Front-end DTI ratio | 20.53% |
| Back-end Costs (Debts): | |
| Total of All Monthly Car Payments | $600 |
| Total of All Monthly Student Loan Payments | $300 |
| Monthly Minimum Credit Card Payments | $200 |
| All Other Monthly Consumer Loan Payments | $400 |
| Total Monthly Front-end & Back-end Debt Payments | $3,758.33 |
| Back-end DTI ratio | 34.17% |
In this example, if you apply for a mortgage with your spouse, your front-end DTI ratio will be 20.53%, and your back-end DTI ratio will be 34.17%. If your lender’s DTI limit is 28% for front-end DTI, and 36% for back-end DTI, you have a good chance of qualifying for a mortgage. And since your DTI is low, you’re entitled to a more favorable rate.
Getting a Co-signer
In certain cases, if you’re applying individually for a mortgage, you might not qualify on your own. When this happens, you can try to get a co-signer to help you obtain approval. This is a viable strategy if you have poor credit or low income, but still want to secure a mortgage. People who co-sign on loans are usually trusted family members such as parents, siblings, or close friends. They agree to this arrangement to assist family members or friends with low credit qualify for a loan. If you have someone you can depend on who is willing to co-sign for you, consider this option.
Essentially, a co-signer guarantees your loan by agreeing to make mortgage payments in case you fail to pay your mortgage. Note that as a co-signer, they do not have an active stake and interest in the investment. They are simply using their resources to help secure the mortgage. It’s an added responsibility for the co-signer, so make sure they understand the conditions before they agree. They must also have a good credit score to be eligible to co-sign your mortgage. So be sure to find someone who has your back.
Ways to Improve Your DTI
Before applying for a mortgage or any type of loan, make sure to improve your DTI ratio. If your DTI is high, it’s wiser to buy a house next year than to do so now. If you do get approved, you’ll likely get a lower loan amount and a higher rate. In some cases, homebuyers settle for a cheaper house to qualify for a mortgage. But of course, it’s ideal to fix your DTI ratio and your overall credit profile first to secure your preferred home.
Furthermore, a high DTI ratio doesn’t just prevent you from obtaining a loan. It might indicate you’re struggling to make ends meet. With little wiggle room in your budget, sooner or later you might miss loan payments. You’re also less likely to save for emergency funds. If you’re faced with situations such as an accident, sudden illness, or job loss, you won’t have ample funds to cover your expenses. To steer clear of this risk, make sure to maintain a low DTI ratio. You can check your DTI ratio yearly or quarterly to make sure its within a good level.
To help improve your DTI ratio, here are several concrete steps you can take:
Avoid Taking More Credit
Keep your debt from growing by avoiding more debt. Do not take a car loan or personal loan before getting a mortgage. This increases your DTI ratio, which is apparent when lenders review your profile. Also avoid making large credit card purchases before applying for a mortgage. If you know something can wait, be patient before taking out another loan for a large expense. Again, having too many debts on your profile is a red flag for lenders.
Reduce Your Debts
Make an effort to actively pay down your debts. While this is easier said than done, it’s best to come up with a strategy. If you have large credit card balances, a student loan, and a car loan you’re still paying, create a feasible payment plan. Make a list of all your debts and focus on one until it’s paid off. Set aside extra payments and diligently pay them toward your focus debt. Then, move on to the next debt. Do this until you’ve significantly reduced or cleared most of your balances.
For starters, you can try the snowball method to clear the smallest debt first. You might find it easier to pay off small debts before working your way toward larger debts. On the other hand, if you want to prioritize high-interest debts first, this is called the avalanche method. Financial experts suggest this strategy because it helps you pay less overall interest compared to the snowball method. Whatever method you choose, make sure to be consistent with your repayment plan.
Note that making extra payments toward your debts will increase your DTI temporarily. But once you’ve eliminated a large balance or reduced most of your balances, expect your DTI to decrease. This will also improve your credit score.
Debt Consolidation
Consider consolidating your debts if you’re struggling with too many high-interest loans. Debt consolidation is basically taking out new loan to pay off several consumer debts with different rates. Your debts are merged into one account, which usually has a lower rate and more favorable payment terms. This option simplifies your payment strategy, requiring only one payment for all your debts. Consolidating high-interest debts into a much lower rate also helps you save on interest charges. This frees up more cash, which you can put as extra payments to further reduce your debt.
However, it can have a slightly negative effect on your credit score at the beginning. Choosing this strategy is often seen as a red flag. Since lenders prefer borrowers with a clean payment history, a debt consolidation record is a sign that you’re having trouble with payments. However, it’s better than completely defaulting on your loans. Once you’ve paid down your debts, in the long run, debt consolidation can help increase your credit score.
Increase Your Income
Your next course of action is to find ways to increase your income. If you’ve been working for several years and you’ve earned your employer’s confidence, try to negotiate for a larger salary. While it takes guts to ask for a raise, you’ll never know unless you try. If a higher salary is not possible, you can rack up extra income by rendering overtime work. You can even take on freelance jobs during your available time. Depending on your skills and interests, think of things you can do on the side.
These days, there are plenty of online platforms such as Upwork, Fiverr, and Freelancer.com that can get you connected to prospective clients. People look for writers, graphic designers, tutors, and virtual assistants, to mention a few. There are all sorts of part-time jobs, so you might find one that suits you. Just make sure your part-time work does not interfere with your main job. It’s more important to protect your primary source of income than to allot too much time on a side-gig.
In other cases, people bake on their free time and sell confections at weekend markets. You can even be a pet sitter or dogwalker, which are also legitimate jobs. If you have pre-loved collectors’ items that you’re ready to part with, you can sell them for a considerable sum. Or put up a garage sale for old stuff you no longer need. There are many opportunities to make extra money, so try them out to supplement your income.
In Summary
DTI ratio is a primary indicator used by lenders to determine loan approval. It influences major financial decisions, such as purchasing a car, buying a home, and applying for almost any type of financing. For this reason, keeping your DTI ratio within a good level should be a priority. Borrowers with high DTI ratios are typically given a higher interest rate and lower loan amount. If your DTI ratio is too high, your mortgage application will likely be rejected.
There are two main types of DTI ratios. These are front-end DTI ratio and back-end DTI ratio. Front-end DTI measures all your housing-related expenses such as mortgage payments, property taxes, and homeowner’s insurance compared to your gross monthly income. Back-end DTI, meanwhile, includes all your housing-related expenses together with your other debts. It includes credit card payments, auto loans, and student loans, etc.
Between the two DTI ratios, most lenders regard back-end DTI with more weight. Borrowers must maintain a back-end DTI no higher than 43% to obtain a qualifying mortgage. But to be safe, most conventional lender prefer a back-end DTI ratio no higher than 36%. If you have low income and a relatively high DTI ratio, you can also try government-back loans. These usually allow higher DTI limits compared to conventional mortgages.
Apart from increasing your chances of mortgage approval, improving your DTI ratio comes with benefits. Reducing your debts help free up your cash flow, allowing you to set aside money for emergency savings, retirement funds, and even profitable investments. A healthy DTI ratio means you have enough money to make timely debt payments. When you have a lot of extra room in your budget, you’ll have money to cover emergency expenses without relying on more debt.
In the long run, reducing your DTI ratio also improves your credit score, which makes you a more creditworthy borrower to lenders. This will make it easier to secure loans in the future, ensuring you have enough money for consistent debt payments.
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