- Mortgage-to-income ratio is a metric used by lenders to see how much of your income goes toward debt payments.
- MTI is a type of debt-to-income ratio, and mortgage lenders generally look for an MTI of 28% or less.
- You can lower your ratio by paying down your debt balances or increasing your income.
If you're applying for a mortgage, one of the factors that mortgage lenders consider is your debt-to-income ratio (DTI) — and specifically, your mortgage-to-income ratio.
These ratios reflect how much of your gross monthly income goes toward your mortgage payment and other debt costs, and they're an important factor in determining whether you qualify for a loan (and have the ability to repay it) — and how much you can borrow.
Here's what to know about mortgage-to-income ratios.
Ideal mortgage-to-income ratios
The exact ratios you'll need to have vary by lender and loan program, but here are some general rules to go by.
28/36 rule
The 28/36 guideline says that you shouldn't spend more than 28% of your gross monthly income on housing expenses — things like your mortgage payment, taxes, and insurance.
The "36" means your total debt payments shouldn't exceed 36% of your monthly income. These include your housing payment, as well as credit card, student loan, car loan, and other monthly payments you might have.
Variations
Some lenders and loan programs allow for higher ratios than this. FHA loans, for example, allow debt-to-income ratios of up 57%.
You may also be able to make up for a too-high ratio with what lenders call "compensating factors." These are things that lessen your risk of non-payment, such as a flush savings account, lots of assets, or a very high credit score.
How to calculate your mortgage-to-income ratio
Your mortgage-to-income and debt-to-income ratios refer to how much debt you pay each month in relation to your gross monthly income. This is an important consideration because when a lender approves a mortgage, they want to make sure you have enough income to pay back the loan.
To determine your mortgage-to-income ratio — also called your front-end DTI — you'll take your monthly mortgage payment, including property taxes, homeowners insurance, and homeowners association dues (if applicable) and divide that by the amount of gross income you earn each month.
Your gross income is the amount of money you earn before any taxes or deductions are withheld. Your debt payments refer to the amount of money you spend each month on your mortgage, loans, or credit cards.
To determine your total DTI — also called the back-end ratio, you'll add up all your monthly debt payments, including your mortgage, credit cards, auto loans, and any other payments you're obligated to make each month and then divide by your gross income.
Example
For example, let's say Amelia wants to buy a home for the first time. Her gross monthly income is $5,000 and her monthly debt payments include a $300 car loan, $100 minimum credit-card payments, and $400 student loan payments. Amelia's debt-to-income ratio would be 16% ($800 / $5,000 = 0.16). With such a low debt-to-income ratio, she'd likely be favorable to mortgage lenders.
However, your lender will also factor in the proposed monthly payment of the loan you're trying to take out as part of your DTI. This will limit how much you can borrow.
Say Amelia wants to get a $300,000 mortgage with a 6% rate. This would come with a nearly $1,800 monthly mortgage payment. If we add that monthly payment to Amelia's other debts, her DTI shoots up to 52%. If Amelia is able to qualify for a mortgage, it's likely that she'd qualify for less than the $300,000 she was hoping for.
Factors affecting your eligibility
There are many factors that impact your eligibility for a mortgage loan, and debt-to-income ratios are just one of them. Here's what to know about qualifying for your loan:
Credit score
Your credit score is one of the most important factors when applying for a loan. Not only do most loan programs have minimum credit scores you'll need to meet, but your score also speaks to your risk as a borrower. How likely are you to repay your loan? The more likely you are, the easier it will be to get approved.
Debt-to-income ratios
DTIs are important, as they tell a lender just how much of your income is spoken for. If your debt payments take up a large portion of your monthly income, it's going to be a challenge for you to make your mortgage payments on time.
Down payment
Your down payment plays a big role, too. The more you put down, the less the lender has to loan you — and the less risk they take on. This can make it easier to qualify for your mortgage.
Interest rates
The mortgage interest rate you get can impact your eligibility as well. If you get a higher rate, that will mean a larger monthly payment and higher DTI, which can make it challenging to qualify. The lower your rate, the better poised you'll be to qualify.
Loan type
Finally, the mortgage type you choose factors in. Each loan type has different requirements for DTI, credit score, down payment, and more. This is why it's important to consult a mortgage professional and choose the right loan type for you.
Tips to improve your mortgage-to-income ratio
If you've done the math and your mortgage-to-income or debt-to-income ratio is higher than it should be, you may want to improve it before applying for a loan. In order to lower your debt-to-income ratio, you have a few options:
Increase your income
There are several ways to do this. You might choose to negotiate a raise at your current job or take on more hours. You could also work on finding a side hustle or freelance work to bring in some extra cash.
Reduce your debt
Paying down your debts can help you lower your ratios, too. You can do this by paying more than the monthly minimums each time or putting a lump sum toward your balances. You should also avoid taking out any additional debt as you chip away at your current balances.
Save for a larger down payment
The larger your down payment, the less you have to borrow. This will automatically reduce your mortgage-to-income ratio and your debt-to-income ratio as well.
You could also opt for a lower-priced home, which would have the same effect.
Improve your credit score
Higher credit scores typically lead to better interest rates. These can reduce your monthly payment and, therefore, your debt-to-income ratios, too.
To improve your credit score, reduce your debts, pay your bills on time, and dispute errors on your credit report.
FAQs about mortgage-to-income ratio
You may be able to get a mortgage if your debt-to-income ratio is higher than the maximum allowed. To do this, you would need what lenders call "compensating factors." These often include a large down payment, a robust savings account, or a very high credit score.
Lenders and loan programs have maximum debt-to-income ratios they'll allow for borrowers. These ensure you can afford your monthly payments and don't overextend yourself on debts.
Lenders also consider your credit score, down payment, loan amount, and employment history when evaluating your loan application.
