What is the Typical DTI for Conventional Loans?

Buying a home is an exciting milestone in life But before you start house hunting, you need to make sure you can get approved for a mortgage One of the key factors lenders look at is your debt-to-income ratio, or DTI. This measures how much of your income is tied up in debt payments.

Conventional loans backed by Fannie Mae and Freddie Mac are the most common type of mortgage for home buyers They typically have more flexible DTI requirements than government-insured loans like FHA and VA loans

In this article, we’ll look at what debt-to-income ratios are usually allowed with conventional home loans. We’ll also go over how lenders calculate your DTI, plus tips for improving yours

What Is Debt-to-Income Ratio?

Your debt-to-income ratio compares your monthly debt payments to your monthly pre-tax income.

To calculate your DTI:

• Add up all your monthly debt payments, including future estimated mortgage payment
• Divide the total by your gross monthly income
• Multiply by 100 to get a percentage

For example:

Monthly debts:

• Estimated mortgage payment: $1,500
• Car loan: $300
• Credit card minimum payments: $150
• Total monthly debts: $1,950

Gross monthly income: $5,000

$1,950 / $5,000 = 0.39
0.39 x 100 = 39% DTI

In this example, your DTI is 39%.

The lower your DTI ratio, the more affordable your debts are relative to your income. A lower DTI signals to lenders that you can comfortably manage a new mortgage payment.

What’s a Good DTI for Conventional Loans?

Here are the general DTI recommendations for conventional mortgages:

• 36% or below: Excellent
• Up to 43%: Good
• Up to 45%: May be allowed with good credit and compensating factors
• Up to 50%: Maximum allowed on some loans if you have excellent credit or make a large down payment

According to mortgage expert Brian Martucci:

“In general, borrowers should have a total monthly debt-to-income ratio of 43% or less to be eligible for a conventional loan backed by Fannie Mae or Freddie Mac.”

However, it’s often possible to qualify for a conventional mortgage with a higher DTI, depending on the lender.

Many conventional loans allow for a DTI as high as 45%. And some lenders will go up to 50% DTI for well-qualified applicants with things like:

• A credit score of 720 or higher
• Significant cash reserves
• A low loan-to-value ratio (high down payment)

The bottom line is that conventional loans can accommodate higher debt-to-income ratios than you may think. Don’t assume you need to get your DTI below 43% to qualify.

Front-End vs Back-End DTI

When reviewing your mortgage application, the lender will look at two DTIs:

Front-end DTI – Your future estimated mortgage payment divided by your gross monthly income. Most lenders want this to be 28% or lower.

Back-end DTI – Your total monthly debt payments divided by your gross monthly income. This is the main DTI conventional lenders look at for approval.

As long as your back-end DTI is 43% or less (or up to 50% with some lenders), your front-end ratio isn’t as critical.

How Lenders Calculate Your Debt-to-Income Ratio

When calculating your DTI, lenders will look at:

Numerator – Monthly debts:

• Future mortgage payment
• Credit card minimum payments
• Auto, student, and personal loans
• Child support and alimony

Denominator – Gross monthly income:

• Stable income sources like W-2 wages
• Self-employment income
• Pension, Social Security, alimony received
• Investment income

Lenders want to see that your income can comfortably cover your debts. Making on-time payments is also important.

“We look for a history of managing debt properly by making at least the minimum required payments each month,” says mortgage lender Jared Maxwell.

Tips for Improving Your Debt-to-Income Ratio

If your DTI is too high for lender comfort, here are some tips to improve it before applying:

Pay down debts – Attack high-balance debts to knock them out. Even if you can’t pay in full, chip away at balances to lower minimum payments.

Avoid new debt – Don’t take on additional payments like a car loan right before applying. Wait until after you close on the home.

Increase income – Take on a side gig or freelance work to boost your stable income. Lenders may require 2 years of history in a new income source.

Add a co-borrower – If you apply with a spouse or partner, their income can help dilute a high DTI. Make sure their credit also meets requirements.

Make a larger down payment – The more you put down, the smaller your mortgage. This keeps the new payment low relative to your income.

Shop lenders – Each lender may allow different maximums. Find one who can accommodate your specific situation.

The Bottom Line

While it’s ideal to have a DTI of 36% or less, conventional loans can allow ratios up to 50% in some cases. The most common cap is 43-45%.

Work on reducing your debts and increasing your income before applying. But don’t panic if your DTI creeps above 43% – you still have options. Shop around for a lender that can make your home ownership dream a reality.