Jean Chatzky
Do one thing: Don’t rely solely on your credit score before applying for a home loan. Use an online debt-to-income or DTI calculator to figure out what your debt-to-income ratio will be with a new loan ahead of time.
The Number One Reason for Loan Rejections
When evaluating home loan applications, lenders look for more than just a solid credit score. Most often, they look at the bigger picture of your financial life, including your debt-to-income ratio (DTI).
Impact of Debt-to-Income
According to a May 2026 report from the Federal Reserve Bank of Saint Louis, the single most important metric is your debt-to-income ratio.
- What is DTI? The share of your gross monthly income used to pay back debt (including the interest payment and the amortization of the principal).
This ratio is the number one reason lenders give when rejecting an application, notes the Fed, making up some 35% of all denials, which was higher than credit history (at 29%), collateral, and every other factor reported.
- Why is that? A high ratio can signal that someone’s income may not be enough to cover the new loan and all of the other current monthly debt payments.
People with Good Credit Scores Still Have Loan Applications Denied
Jeff Judge, CFP, AEP, ChFC, a managing partner with Chesapeake Financial Planners, says he works with clients who have been blindsided by a loan denial despite carrying a 740 (or higher) credit score.
“The culprit, almost every time, is DTI,” he explains. “Lenders care about credit score because it tells them how reliably you’ve managed debt in the past. But DTI tells them whether you can handle one more payment right now.”
What’s an Acceptable Debt-to-Income Ratio?
So, what should your DTI be to qualify for a loan? It depends. For the best financing terms, you’ll want to have a DTI at 36% or lower, says Judge, noting that’s well below the number that comes up most often in conventional mortgage lending, which is 43%.
Why is 43% Significant?
The 43% DTI threshold is “roughly where Fannie Mae and most traditional lenders draw the line,” he explains. “The real target is 36% or below, especially if you’re carrying variable-rate consumer debt. Some FHA loans go higher, and I’ve seen approvals up to 50%, but those clients often pay for it with a higher interest rate.”
Calculating your DTI
To determine your DTI for a mortgage, you can skip the guesswork and use an online calculator. There are dozens to choose from.
If you would rather go the old-school route to calculate, do the following:
- Add up all of your minimum monthly debt payments.
- Divide the total by your gross monthly income.
- (Pro-tip: You will also want to add in a potential monthly payment for a new loan that includes interest, insurance, and property taxes.)
Debt to Include in Your Debt-to-Income Calculation
When calculating your DTI, make sure to include the following types of debt and other obligations in the first part of your equation:
- Alimony payments
- Car loan payments
- Child support payments
- Credit card payments
- Personal loan payments
- Student loan payments (often including deferred loans)
A Note on Dealing with Deferred Loans and DTI
Unfortunately, things like deferred student loans can be a landmine when determining DTI. They are often counted in the mix even when payments aren’t currently due, notes Judge. If you are in this situation, it’s smart to check in with your lender to see if a deferred student loan will be counted toward your DTI.
How to Improve Your Debt-to-Income Ratio
When it comes to your DTI, the two levers at work are income and debt. Because income may be harder to bump up more quickly, Judge says, it’s often more expedient to chip away at debt. He tells clients to consider these actions to lower DTI:
- Target your highest-balance revolving accounts first.
- Pay down small balances with fixed monthly payments, too.
- Delay any other new financing for at least 90 days before a major application.
- Request a credit limit increase on existing revolving accounts (then make sure you keep a lid on usage).
- Get more information on how to use credit limit increases strategically.
DTI vs Credit Scores Key Takeaways
While it’s important to maintain a strong credit score before applying for a mortgage or refinancing an older home loan, a credit score above 740 won’t save you if your DTI is over 43%, says Judge. But remember, monthly debt obligations are movable before an application. If you are in the market for a home loan or looking to refinance, now is the time to map out exactly what’s going into your DTI so you can get a better idea of how to bring the ratio down.
With reporting by Casandra Andrews
Chris O'Shea
