Debt-to-Income: the Number Lenders Judge You On
Lenders lean on this number more than almost anything else, and most people never learn their own until they are refused. There are two versions - housing alone, and everything together. On a $6,000 monthly income, $1,800 of housing plus $400 of other debts puts you at 30% and 36.7%. Comfortable is lower than you think.
The number you find out about too late
Credit scores get all the attention. Debt-to-income quietly does more work.
A lender uses your score to decide whether to trust you. They use debt-to-income to decide whether you can actually afford the payment. You can have an excellent score and still be refused because the second number does not work.
Almost nobody knows their own until an application forces the issue.
Two ratios, not one
| Ratio | What it counts |
|---|---|
| Front | Housing payment only |
| Back | Housing plus every other debt payment |
The back ratio is usually the one that binds, because it includes the car loan, the student loans and the card minimums.
On a $6,000 monthly income, from the debt-to-income calculator:
| Housing | Other debts | Front | Back | Where that sits |
|---|---|---|---|---|
| $1,500 | $200 | 25.0% | 28.3% | Comfortable |
| $1,800 | $400 | 30.0% | 36.7% | Stretched |
| $2,200 | $900 | 36.7% | 51.7% | Severe |
The middle row is what a great many households look like, and it is already described as stretched. That is worth sitting with.
It is measured on gross income
This detail matters more than it sounds.
The ratios use your income before tax. So a 43% back ratio is 43% of gross - which, after tax and payroll deductions take their quarter or third, can be well over half of what actually reaches your account.
That is a large part of why a mortgage a lender happily approves can feel so tight in practice. The lender’s arithmetic is not wrong; it is just measuring a bigger number than the one you live on.
What other debt really costs
$400 a month of car and student loan payments does not cost $400 a month.
Every dollar of existing debt payment displaces a dollar of mortgage payment, and at typical rates a dollar of monthly payment supports roughly $145 of house.
So $400 a month costs around $58,000 of borrowing power. On the home affordability calculator, $600 a month costs $86,803.
That has a practical consequence people rarely act on: clearing a car loan before applying can be worth more than saving the same amount as deposit. Worth working out which does more in your case.
The fastest way to improve it
Counter-intuitive but reliable: clear one debt entirely rather than paying a bit off several.
Debt-to-income counts payments, not balances. Paying $3,000 spread across three loans reduces three balances and leaves all three payments intact - the ratio barely moves.
Putting the same $3,000 into clearing one $300-a-month loan removes that payment completely. The ratio improves immediately.
If you are preparing for a mortgage application, this is the single most effective thing you can do with a limited amount of money.
What to check before applying
- Work out both ratios on your gross monthly income.
- Note that gross is not what you live on - judge affordability on take-home separately.
- See which single debt, cleared, moves the number most.
- Do not open anything new. A car loan taken three months before a mortgage application can cost you the mortgage.
- Check utilisation too. It is a different test and lenders look at both - see the credit utilisation calculator.
Work out your own in the debt-to-income calculator - it shows both figures lenders use and how much borrowing room is left.
Common questions about debt-to-income
What is debt-to-income?
Your monthly debt payments as a share of gross monthly income. There are two versions: the front ratio counts housing alone, and the back ratio counts every debt payment including housing. Lenders look at both, and the back ratio is usually the binding one.
What ratio do lenders want?
It varies by loan type, but a back ratio around 43% is a common ceiling and many lenders prefer lower. The more careful guidance puts housing alone at about 28%. On a $6,000 income that is $1,680 of housing - considerably less than most people expect.
How much does other debt cost me?
More than the payment. Every dollar of monthly debt payment displaces a dollar of mortgage payment, and at typical rates a dollar of payment is worth roughly $145 of house. So $400 a month of car payments costs around $58,000 of borrowing power.
Is it based on gross or take-home pay?
Gross - your income before tax. That is worth knowing because it makes the ratios look more comfortable than they feel. A 43% ratio on gross income can be well over half your actual take-home pay.
How do I improve it quickly?
Clear a small debt entirely rather than paying a bit off several. Removing a $300 monthly payment improves the ratio immediately; reducing three balances by a third does almost nothing, because the payments stay the same.