Debt to Income Ratios - Pivot Lending Group (2024)

FAQs

What is a good debt-to-income ratio for lenders? ›

Debt-to-income (DTI) ratio measures the percentage of a person's monthly income that goes to debt payments. A DTI of 43% is typically the highest ratio that a borrower can have and still get qualified for a mortgage, but lenders generally seek ratios of no more than 36%.

If you're looking for a loan, you'll likely need a DTI ratio of 43% or lower to qualify for reasonable terms. But, the lower it is, the better. That's not just the case in terms of your ability to borrow, but also in terms of your financial stability. If your ratio is higher than 35%, it's likely time to act.

Lenders will want you to have a debt-to-income ratio of 43% to 50% at most, although some will require this to be even lower.

To apply for a USDA Loan, you must have: Proof of citizenship (or legal permanent residency) A minimum credit score of around 620 (credit score requirements might vary per borrower) A debt-to-income (DTI) ratio of 41% or less.

Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.

According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.

Key takeaways

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

Most conventional loans allow for a DTI ratio of no more than 45 percent, but some lenders will accept ratios as high as 50 percent if the borrower has compensating factors, such as a savings account with a balance equal to six months' worth of housing expenses.

What disqualifies you for a HELOC? You may be disqualified from opening a HELOC if you do not meet the lender requirements. This may include low equity in your home, inadequate income or a low credit score.

How difficult is it to get approved for a HELOC? ›

Are HELOCs easy to qualify for? HELOCs can be easy to qualify for when you have good or excellent credit (620 or above) along with 15% to 20% equity. It's also recommended to have a DTI ratio no higher than 43%.

HELOC credit score requirements typically start at 620, but most lenders are looking for scores of 680 or higher. To qualify for favorable terms, your best bet is to have scores in the 700s.

How much can that ratio be? According to the FHA official site, "The FHA allows you to use 31% of your income towards housing costs and 43% towards housing expenses and other long-term debt."

It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

To qualify for most conventional loans, you'll need a DTI below 50%. Your lender may accept a DTI as high as 65% if you're making a large down payment, you have a high credit score or have a large cash reserve. For a jumbo loan, you'll typically need a DTI of 45% or lower, and most lenders consider this a hard cap.

From a pure risk perspective, debt ratios of 0.4 (40%) or lower are considered better, while a debt ratio of 0.6 (60%) or higher makes it more difficult to borrow money. While a low debt ratio suggests greater creditworthiness, there is also risk associated with a company carrying too little debt.

A debt ratio below 30% is excellent. Above 40% is critical.