When you ask a lender how much you can borrow to buy a home, the first number they run is not your credit score, it is your debt-to-income ratio (DTI). This measures what percentage of your income each month goes to paying debt. Understanding DTI helps you know in advance what price home you can afford.
How DTI is calculated
DTI is your total monthly debt divided by your gross (pre-tax) monthly income. There are two kinds:
- Front-end DTI: counts only housing costs (loan principal, interest, property taxes, insurance, and HOA fees if any).
- Back-end DTI: counts all monthly debt, including housing plus credit cards, car loans, student loans, and alimony.
Example: gross income of $6,000 a month and total monthly debt of $2,400 gives a back-end DTI of 40%.
Common DTI thresholds
Each loan type has different limits, but in general:
- Conventional: usually up to about 45% to 50% with a strong file.
- FHA: can be more flexible, sometimes up to 50% or higher with compensating factors.
- Many lenders like to see a back-end DTI under 43% to be safe.
The lower your DTI, the easier your approval and sometimes the better your rate.
Why DTI caps your loan amount
Say a lender allows a maximum DTI of 45%. On $6,000 a month of income, your allowed total debt is $2,700. If you already pay $700 for a car loan and credit cards, only $2,000 is left for housing. That $2,000, after taxes and insurance, decides the maximum home price you can buy. This is why paying down other debt lets you buy a bigger home.
How to lower DTI before applying
- Pay off small debts like low card balances or loans with only a few payments left, to erase the monthly payment entirely.
- Avoid financing a car during the preparation period, since a $500 car payment can cut your home borrowing power by tens of thousands of dollars.
- Boost documented income: steady side income over two years, rental income, or adding a co-borrower with income.
- Put more money down to reduce the loan and the monthly payment.
Don't forget the rest of the picture
DTI matters but is not everything. Lenders also look at your credit score, reserve savings, and job stability. A balanced file is always stronger than one that excels in only one area.
To learn your current DTI and what price home you can afford, reach out to William for a free consultation. He can run the numbers for you and point out which debts to pay off first to increase your borrowing power.