Understanding the Debts in Your Debt-to-Income Ratio

When applying for a loan, particularly a mortgage, your debt-to-income ratio (DTI) is a critical number that lenders scrutinize. It is a simple comparison of how much you owe each month to how much you earn. While most borrowers understand the “income” side of this equation, the specific monthly debts included in the DTI calculation can be less clear. Essentially, lenders include any recurring, contractual monthly payment that represents a legal obligation and draws from your income before you can use it for other expenses. These debts are broadly categorized into housing expenses and other recurring installment and revolving debts.

The most significant component for most borrowers is housing-related debt. This is true whether you are applying for a new mortgage or refinancing an existing one. For the new mortgage you are applying for, the lender will use the projected total monthly payment, which includes principal, interest, property taxes, homeowner’s insurance, and, if applicable, mortgage insurance and homeowners association (HOA) fees. If you already own a home, your current mortgage payment, with all those same components, is included. For rental properties, the monthly mortgage payment on each investment property is factored into your debts. It is important to note that for rental properties, lenders may offset this debt with a portion of the rental income, but the payment itself is part of the initial calculation.

Beyond housing, any other loan with a fixed payment schedule is included. This encompasses monthly obligations for auto loans, student loans, personal loans, and boat or recreational vehicle loans. For installment loans, lenders use the minimum monthly payment listed on your credit report or financial statements. With student loans, even if they are in a deferred or forbearance status, lenders will often calculate a hypothetical monthly payment, typically one percent of the loan balance, or use the payment amount that will eventually come due. Co-signed debts are also fully counted if you are the primary borrower, and often even if you are merely the co-signer, as you are legally responsible for the payment.

Revolving debt, primarily credit cards, is also a key part of the DTI calculation. Lenders do not use your total credit card balance; instead, they use the minimum monthly payment reported by the creditor. This applies to all credit cards, store cards, and lines of credit. If you consistently pay more than the minimum, the lender will still only count the required minimum payment. However, if you have a charge card that requires the full balance to be paid each month, it typically is not included as a recurring debt. Other significant obligations that must be considered are alimony and child support payments. These court-ordered payments are legal obligations that reduce your disposable income and are therefore always included in your monthly debts for DTI purposes.

Crucially, not all monthly expenses are considered debts in the DTI formula. Regular living costs like utilities (electricity, water, gas), cable and internet bills, health insurance premiums, and commuting costs are not included. Similarly, discretionary spending on groceries, entertainment, or subscriptions does not factor into this specific calculation. The distinction lies in the legal obligation; a credit card bill is a debt you must legally pay, while a utility bill is a service charge that can vary and does not appear as an installment loan on your credit report. Understanding exactly which debts are counted empowers borrowers to better prepare their finances before applying for a major loan. By managing and potentially reducing these specific monthly obligations, applicants can improve their DTI ratio, enhancing their chances of loan approval and securing more favorable interest rates.