How to calculate your debt-to-income ratio for a mortgage

One major factor lenders consider when reviewing your mortgage application is your debt-to-income ratio (DTI).

Essentially, how much of your paycheck goes toward paying down debts.

A lower DTI tells lenders you have a healthy reserve to draw on and will earn you approval and a good mortgage rate.

A higher ratio, however, could suggest you're a big risk to a lender.

Lenders want borrowers who can keep up with their mortgage payments. One way they find them is by looking at applicants' current debt load.

There are two types of debt-to-income ratios and lenders may look at either (or both):

• Front-end DTI: This only includes housing expenses, like your rent or mortgage payment, property taxes and homeowners insurance.
• Back-end DTI includes all debt payments, including housing.

Eligible payments for back-end DTI include:

• Rent or mortgage  
• Credit card balances
• Car loans, student loans, personal loans
• Home equity loans or HELOCs
• Child support or alimony

Payments that don't factor into your back-end DTI:

• Groceries
• Utility bills
• Health insurance
• Gas or transportation

To determine your debt-to-income ratio, divide your total monthly debt payments by your take-home pay.

For example, if you pay $500 in student loans every month, $400 for your car payment and $100 goes toward your credit card, that's $1,000 in monthly debt.

If your take-home pay is $5,000 a month, you would divide $1,000 by $5,000 and get a DTI of 20%.

According to the "28/36 rule," you shouldn't spend more than 28% of your gross monthly income on housing and no more than 36% on all debts combined.

A DTI ratio of 36% or less will almost surely get you the best rates. Lenders generally prefer a ratio of 43% or less, but may approve borrowers with DTI ratios up to 50%, especially if they have good credit or significant cash reserves.

If you're worried that your DTI will prevent you from getting the best rate, the first thing to do is start paying down your debts. (Well, that or get a raise.)

There are several approaches to tackling outstanding debt.

The avalanche method

Start by paying down the debt with the highest interest rate. Once that's paid off, move on to the bill with the second-highest rate, and so on. Following the avalanche method, you should end up paying less in interest overall.

The snowball method

With the snowball method, you pay off the smallest balance first and then move on to the second smallest balance, and so on. The theory here is that knocking out easier targets first gives you more encouragement to stay on track climbing out of the red.

Refinancing

You may be able to refinance your student loans or auto loans. If clearing debt is your goal, aim to lower your rate or pay off your balance faster. That way, you'll pay less in interest over the life of the loan.

Autopay is one of our top picks for auto refinancing, with options for traditional and cash-back refinancing, as well as lease buyout option to pay off your lease early.

Debt consolidation

A debt consolidation loancould help with serious credit card bills, since personal loans typically have lower rates than cards. With Happy Money, you can arrange to have your creditors paid directly.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage article is based on rigorous reporting by our team of expert writers and editors. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.