DTI

DTI (Debt-to-Income) is the ratio of total monthly debt service to gross monthly income, expressed as a percentage. Mortgage lenders use it as the back-end ratio in qualifying you for a loan.

Two flavours:

• Front-end DTI — housing-related debt only (PITI: principal, interest, taxes, insurance). Standard ceiling: 28% of gross income for a conservative loan.
• Back-end DTI — all debt service (housing PITI plus car loans, student loans, credit-card minimums, alimony, child support). Standard ceiling: 36% conservative, 43% under the Qualified Mortgage rule, up to 50% in some FHA programs.

Notes that catch borrowers off-guard:

• Gross income, not net. The denominator is pre-tax. A household with 30% effective tax rate at the 36% DTI ceiling is really spending 51% of take-home pay on debt.
• Minimum payments count. A credit card with $20,000 balance and $400 minimum counts as $400/month — not the full balance. Carrying a large credit card balance hurts DTI through the minimum payment, not the balance directly.
• Income definition. Salaried W-2 income counts straightforward. Self-employed income is averaged over two years and may be discounted. Bonus and commission income often need a two-year history to count fully.

Lower DTI = better loan terms. Pay down high-minimum debts before applying for a mortgage; closing unused credit cards typically doesn’t help DTI (the minimum payment was already $0), but can hurt utilisation on credit-score formulas. The trade-off is worth working through case by case.

The 43% Qualified Mortgage threshold: Dodd-Frank’s Ability-to-Repay rule (effective 2014) capped DTI at 43% for any mortgage to qualify as a “Qualified Mortgage” (QM) — a regulatory status that provides lenders with safe-harbour protection from borrower lawsuits if the loan defaults. Loans above 43% DTI can still be made, but lenders bear more legal exposure and typically require higher rates or compensating factors (large down payment, high credit score, substantial reserves). In 2021 the CFPB replaced the strict 43% cutoff with a price-based standard, but most lenders kept the threshold in practice as their internal underwriting cap. Reference: CFPB — Regulation Z §1026.43 (Ability-to-Repay).

Worked example: borderline qualification

Household gross income: 9,000 USD/month. Existing debts: 450 USD auto loan, 280 USD student loan, 60 USD credit-card minimum. Proposed PITI on the new mortgage: 2,400 USD/month. Front-end DTI = 2400 / 9000 ≈ 26.7% — under the 28% conservative ceiling. Back-end DTI = (2400 + 450 + 280 + 60) / 9000 = 3190 / 9000 ≈ 35.4% — under 36%. Comfortably qualified. Add a 350 USD/month new car loan and back-end jumps to 39.3%; still inside the 43% QM cap but the rate sheet usually steps to a worse pricing tier above 36%. Paying down the credit card to zero saves 60 USD/month — a 0.7-point DTI improvement that can be the difference between two pricing tiers.

Why DTI matters more than the headline payment

Two borrowers with identical incomes and identical proposed mortgages can have wildly different default risk depending on their other obligations. Empirical mortgage-default studies (Federal Reserve, Urban Institute) consistently find DTI is among the top three predictors of 90-day delinquency, alongside LTV and credit score. A 50% DTI borrower defaults at roughly 3× the rate of a 35% DTI borrower with the same credit score — which is why underwriting tightens at exactly the thresholds where the historical default curves bend. See also PITI for the housing component. Reference: Urban Institute Housing Finance at a Glance.