What Is an Ideal Debt-to-Income Ratio and How Does it Affect Mortgage Refinance?

Finding an ideal debt-to-income ratio (DTI) is a bit like finding an ideal romantic partner—it depends on what you’re after and will vary from person to person, but no one wants a deadbeat.

What Is an Ideal Debt-to-Income Ratio and How Does it Affect Mortgage Refinance?

First off, it’s important to know what your debt-to-income ratio is. It’s your combined monthly debt payments divided by your gross monthly income. Lenders use this number to determine your ability to repay a loan.  For those looking for a new mortgage, it may be to your benefit to explore options available for down payment assistance loans which might free up some of your capital and let you pay down other debts.
If you don’t feel like doing the math yourself, you can find a DTI calculator with a quick Google search. But here’s an example for posterity: Say your mortgage payment is $1,800/month, your auto loan is $200/month, and your other debts are $500/month. That’s $2,500/month in total debt payments. Now let’s say your gross monthly income is $7,000/month. That would put your DTI just shy of 36%, with roughly 26% going toward your mortgage.

Typically, lenders want to see a DTI below 36%, with no more than 28% of that allocated to your mortgage. So, hooray, you’ve achieved an ideal DTI by some standards. If you’re freaking out because you don’t fit neatly in those boxes, try not to worry. This isn’t the end all be all. Plus, rules were meant to be broken.

The Qualified Mortgage Ratio

Calculate debt to income ratio

To get a qualified mortgage, a certain type of loan that comes with more stable features that make it more affordable to repay your loan based on the Consumer Protection Finance Bureau’s “ability-to-pay” rule, you generally can’t have a loan DTI over 43%.

There are exceptions for small creditors—defined as lenders with less than $2 billion in assets and that made no more than 500 mortgages in the past year—to offer a qualified mortgage if your DTI is above 43%. Large lenders can still offer you a mortgage if your DTI is over the 43% threshold, but it may not be a qualified mortgage.

This may seem like a no-brainer, but many studies have confirmed that having a higher DTI makes you more likely to struggle to make your monthly payments.

Refinancing your Mortgage


There are several ways to refinance your mortgage, ranging from a cash-out refinance to a home equity loan. So, it’s important to decide which approach makes the most sense for you.

For example, with a cash-out refinance, you rework your existing mortgage to be higher, using the loan to pay off your mortgage and pocketing the rest. But to do a cash-out refinance, you need to have at least 20% equity in your home to qualify.

With a home equity loan, you get a lump sum upfront when you borrow against the value of your property and the equity you’ve built up. If you’re looking to consolidate debt, a home equity loan can be a good option.

As with acquiring any other loan, your DTI is relevant when refinancing your mortgage, and the same high-water marks come into play. The lower your DTI, the better your chances of being approved.

By Casey Musarra

Casey Musarra is a personal finance writer with over a decade of writing experience and a credit score hovering near 800. She has written several hundred articles on topics ranging from taxes to debt-free living. Previous bylines include newsday.com and philly.com.

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