Debt-to-income ratio: how lenders calculate it and what counts

Two ratios from the same numbers

The CFPB describes gross monthly income as generally the money you earn before taxes and other deductions are taken out. That is why the ratio can look lower than your budget feels: the lender divides by pay that never reaches your checking account. Before you shop, also build a mortgage budget from your take-home pay.

The front-end, or housing, ratio divides only the proposed housing payment by gross income. The back-end, or total, ratio adds every other monthly debt. HUD’s handbook for FHA loans limits both when a loan is manually underwritten. In both, the housing payment is more than principal and interest: it includes property taxes, homeowners insurance, any mortgage insurance, and association dues.

Take a hypothetical borrower with gross income of $8,200 a month and three debts: a $415 auto loan payment, a $260 student loan payment, and a $95 card minimum, $770 in all. The proposed loan is $280,000 at a hypothetical 7.00% for 30 years, so principal and interest are $1,862.85. With an assumed $420 a month for property taxes and homeowners insurance, and no mortgage insurance or association dues, the housing payment is $2,282.85. The front-end ratio is 27.8%. Adding the other debts brings monthly payments to $3,052.85 and the back-end ratio to 37.2%.

Sources: CFPB: Debt-to-income ratio · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF) · Fannie Mae Selling Guide: B3-6-02, Debt-to-income ratios · Fannie Mae Selling Guide: B3-6-03, Monthly housing expense

Which payments count, and which generally do not

Fannie Mae’s Selling Guide counts installment debts, such as auto, student, and personal loans, when more than ten monthly payments remain, or fewer if the debt significantly affects your ability to pay. HUD’s handbook is stricter: it leaves out a loan that will be paid off within ten months only if all such payments total 5% of gross income or less, and it counts all student loans. Credit cards count at the required minimum payment, not the balance. If the credit report shows no minimum and nothing documents a lower one, the lender uses 5% of the balance, so a hypothetical $3,100 balance would count as $155 a month.

Fannie Mae counts lease payments however few months remain. It also counts alimony, child support, and separate maintenance when a written agreement requires them for more than ten months; HUD treats child support as a recurring debt. HUD’s handbook lists obligations not considered debt, including utilities, child care, commuting costs, union dues, 401(k) contributions, and insurance other than property insurance.

Sources: Fannie Mae Selling Guide: B3-6-05, Monthly debt obligations · Fannie Mae Selling Guide: B3-6-02, Debt-to-income ratios · Fannie Mae Selling Guide: B3-6-03, Monthly housing expense · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF)

The maximum ratios in the rulebooks

Fannie Mae’s Selling Guide states limits for the total ratio: 36% for manually underwritten loans, up to 45% with the credit score and reserves its eligibility matrix requires, and 50% through Desktop Underwriter, its automated system. Some transactions, including certain cash-out refinance loans, can have lower limits.

HUD’s handbook sets FHA ratio limits for manually underwritten loans: 31% for housing and 43% in total, or higher with a credit score of 580 or more and compensating factors such as verified cash reserves. In HUD’s terms, the no discretionary debt factor in the table generally means your housing payment is your only balance not paid in full monthly. A loan accepted by FHA’s automated TOTAL Mortgage Scorecard is evaluated on overall credit risk instead of this matrix.

These are ceilings, not targets. Fannie Mae’s guide notes that lenders may apply a more conservative approach as long as they meet its minimums. A HUD-approved housing counselor can help you review your numbers before you apply. To turn a limit into a price, the affordability calculator works backward from your income, other debts, and estimated taxes and insurance.

Sources: Fannie Mae Selling Guide: B3-6-02, Debt-to-income ratios · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF)

Student loans on income-driven, deferred, or zero payments

Student loans count even when you are not paying them, but the rulebooks differ. Fannie Mae’s Selling Guide uses the payment on the credit report or, if that is wrong, on your latest statement. If the report shows $0 on an income-driven plan, the lender may document the $0 payment and qualify you with it. For a deferred loan or one in forbearance, it may use 1% of the balance or a fully amortizing payment.

HUD’s FHA handbook requires the reported or documented payment when it is above zero, and 0.5% of the outstanding balance when the credit report shows zero. If the borrower in the example also had a hypothetical $38,000 student loan on an income-driven plan with a $0 payment, Fannie Mae’s documented-plan option would count $0, but FHA’s rule would count $190 a month. That adds 2.3 percentage points to the back-end ratio ($190 divided by $8,200), before the monthly mortgage insurance premium an FHA loan would also add. If the loan were deferred, Fannie Mae’s 1% option would count $380. Ask which method a lender will use.

Sources: Fannie Mae Selling Guide: B3-6-05, Monthly debt obligations · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF)

Income that changes from year to year

Fannie Mae’s Selling Guide requires qualifying income to be stable, documented, and reasonably expected to continue. For bonus, commission, overtime, and tip income, it recommends a two-year history, but a lender may accept as little as 12 months with positive offsetting factors. If the income is stable or rising, the lender averages year-to-date and prior-year earnings over at least 12 months. If it is falling, the lender must confirm it has stabilized, or it cannot be used.

Suppose, hypothetically, you earned $5,700 of overtime last year and $4,500 in the first nine months of this year. That is $475.00 a month last year and $500.00 a month this year, so the trend is rising, and the average over 21 months is $485.71 a month.

If you own 25% or more of a business, Fannie Mae treats you as self-employed and generally requires a two-year history of earnings, though one full year of tax returns from the current business can be enough with documented prior income at the same or a higher level in the same field or in a similar role. The lender starts from the income or loss on your tax returns. For a sole proprietorship, Fannie Mae has it add back recurring items such as depreciation, but other business deductions that lowered your taxable income can also lower the income it counts.

Sources: Fannie Mae Selling Guide: B3-3.1-01, General income information · Fannie Mae Selling Guide: B3-3.3-02, Bonus, commission, overtime, and tip income · Fannie Mae Selling Guide: B3-3.5-01, Self-employed borrowers · Fannie Mae Selling Guide: B3-3.6-03, Schedule C income or loss

What actually moves the ratio

For the hypothetical borrower, paying off the credit card before closing removes the $95 minimum and lowers the back-end ratio to 36.1%. Fannie Mae’s Selling Guide says a revolving balance paid off at or before closing need not be counted, and the account need not be closed. The payoff uses cash you might otherwise put toward closing costs or keep as a reserve, so weigh both. Fannie Mae generally also does not count an installment loan paid down to ten or fewer payments, though it says a payoff made solely to qualify must be carefully evaluated. HUD’s handbook does not allow that paydown on FHA loans.

Adding a co-borrower with $2,400 of gross monthly income and no debts raises household income to $10,600 and brings the ratios to 21.5% and 28.8%. Lenders generally count a co-borrower’s debts too, so the gain shrinks if that person has a car payment. Fannie Mae’s Selling Guide says co-signers and non-occupant co-borrowers sign the note and share liability for it, so adding one is a decision about more than the ratio. Choosing a $250,000 loan instead of $280,000 lowers principal and interest to $1,663.26 and the housing payment to $2,083.26. The card payoff cuts the back-end ratio by 1.1 percentage points, the smaller loan by 2.4 percentage points, and the added income by 8.4 percentage points.

Sources: Fannie Mae Selling Guide: B3-6-07, Debts paid off at or before closing · Fannie Mae Selling Guide: B3-6-02, Debt-to-income ratios · HUD: FHA Single Family Housing Policy Handbook 4000.1 (PDF) · Fannie Mae Selling Guide: B2-2-04, Guarantors, co-signers, and non-occupant borrowers

The 43% rule that no longer defines a qualified mortgage

Under the CFPB’s original ability-to-repay rules, a General Qualified Mortgage could not have a debt-to-income ratio above 43%. The CFPB’s General QM final rule, issued December 10, 2020, replaced that limit with price-based thresholds. It took effect March 1, 2021, and after a delay became mandatory for applications received on or after October 1, 2022. FHA’s 43% benchmark for manually underwritten loans, which can go higher with compensating factors, is a program rule, separate from this federal definition.

Under Regulation Z, a General QM’s annual percentage rate generally must be less than a set margin above the average prime offer rate, a weekly CFPB benchmark based on rates offered on low-risk loans. For a first-lien loan of $137,958 or more in 2026, the margin is 2.25 percentage points. Regulation Z no longer sets one maximum ratio for a General QM. The CFPB notes that for a Qualified Mortgage the lender must still consider and verify your income or assets and debts, and consider your debt-to-income ratio or residual income. Your actual limit comes from the loan program and the lender.

Sources: CFPB: General QM loan definition final rule (2020) · CFPB: General QM mandatory compliance date delay (2021, PDF) · CFPB: Regulation Z § 1026.43, ability to repay and qualified mortgages · CFPB: Regulation Z § 1026.35, higher-priced mortgage loans · CFPB: What is a Qualified Mortgage?

Your next-step checklist

• Total the minimum payments shown on a current credit report.
• Gather two years of records for any variable income.
• Include taxes, insurance, and any mortgage insurance in the housing payment.
• Ask how your student loans will be counted under each loan program.
• Compare the effect of a payoff, a smaller loan, and added income.
• Ask each lender for its own maximum ratios.