Did you know that 35% of mortgage applications are denied due to a high debt-to-income ratio—even for people with great credit? Ever wonder why that happens? Even for applicants with great credit scores? Understanding the balance between your debt-to-income (DTI) ratio and your credit score can make or break major financial decisions, like buying a home or getting a loan.
Hi, I’m Steve Rhode, the Get Out of Debt Guy. I’ve been helping people with debt for decades, and I know how confusing it can be to figure out what really matters when it comes to your financial health. But here is more information on the importance of understanding your debt-to-income ratio.
Have you ever wondered why two people with similar incomes might have drastically different borrowing experiences? We’ll share some relatable stories and figure out whether your DTI or your credit score deserves more of your attention right now.
What Is Debt-to-Income Ratio (DTI) and Why Does It Matter?
According to a recent report by CNBC, rising debt-to-income ratios are causing more mortgage applications to be denied across the country. Understanding your DTI can feel overwhelming, especially if debt already causes anxiety. But knowing this number is empowering—it helps you take control of your financial future.
Think of your DTI like a financial balancing act—it’s the ratio that shows how much of your income goes toward debt payments, similar to how a tightrope walker carefully manages their steps to stay steady.
Understanding your DTI can feel overwhelming, especially if debt already causes anxiety. But knowing this number is empowering—it helps you take control of your financial future.
Your DTI measures how much of your income goes toward paying off debt each month. Lenders use it to assess whether you can afford to take on more debt.
Formula:
| Calculation | Amount |
|---|---|
| Monthly Debt Payments | $2,000 |
| Gross Monthly Income | $6,000 |
| Debt-to-Income Ratio (DTI) | 33% |
DTI = (Total Monthly Debt Payments / Gross Monthly Income) x 100
Example:
- Monthly debt payments: $2,000
- Gross monthly income: $6,000
DTI: 33%
Generally, a DTI under 36% is considered good, but requirements vary based on loan type.
Why It Matters:
- Mortgage lenders scrutinize your DTI more than your credit score.
- A high DTI can block you from borrowing, even if your credit score is excellent.
Story: Imagine Sarah, a nurse who earns $5,000 a month. She feels a constant knot in her stomach whenever she thinks about her debt, wondering if she’ll ever feel financially secure. She has a stellar 780 credit score but a 48% DTI due to student loans and a car payment. When she applies for a mortgage, she’s shocked when the lender says no. Despite her excellent credit score, her high DTI signals that she might struggle to handle a mortgage payment.
Takeaway: When you’re trying to get a mortgage or other significant loans, your DTI often matters more than your credit score.
Tip: Track your monthly expenses for 30 days to identify areas where you can reduce spending and improve your DTI.
What Is a Credit Score and Why Does It Matter?
Many people believe checking your credit score frequently hurts it—a common myth. Want to test your knowledge? Take my quick quiz below to bust more credit myths!
In reality, checking your own score is a ‘soft inquiry’ and doesn’t affect your credit. Think of it like stepping on a scale at home versus having a formal weigh-in at a competition.
Think of your credit score like a financial GPA—it reflects how well you’ve managed debt in the past and influences your borrowing future.
Your credit score is a three-digit number that reflects how reliably you’ve handled borrowed money in the past. It’s based on factors like payment history, amounts owed, credit length, new credit, and credit mix.
Why It Matters:
- A high score makes it easier to get approved for loans, credit cards, and even rental applications.
- It affects the interest rates lenders offer you.
Story: Mike, a small business owner, has a 620 credit score but a low DTI of 20%. He applies for a car loan and gets approved—but with a high interest rate. Why? His credit score signals he’s had some missed payments. If Mike had a higher score, he’d pay less in interest, even though his DTI was excellent.
Takeaway: For credit cards, auto loans, and personal loans, your credit score often carries more weight than your DTI.
Tip: Set up automatic payments to avoid missed payments and improve your score over time.
When Does DTI Matter More?
According to Reuters, mortgage lenders are tightening requirements as DTI ratios rise, making it more important than ever to monitor your DTI before applying for a loan. Imagine Jane, who dreams of buying her first home. She has a solid credit score but carries a high DTI because of student loans. When she applies for a mortgage, the lender is more concerned about her DTI than her credit score, illustrating how crucial this metric is for major loans.
Imagine Jane, who dreams of buying her first home. She has a solid credit score but carries a high DTI because of student loans. When she applies for a mortgage, the lender is more concerned about her DTI than her credit score, illustrating how crucial this metric is for major loans.
| Loan Type | DTI Importance | Credit Score Importance |
| Home Loans | High | Moderate |
| Debt Consolidation | High | Moderate |
| Auto Loans | Moderate | High |
| Credit Cards | Low | High |
- Home Loans: Mortgage lenders care more about your ability to repay than your past behavior.
- Debt Consolidation Loans: Lenders want to see that you won’t be overextended.
- Large Loans: For big financial commitments, a healthy DTI is crucial.
Example: If you’re eyeing a new home, track your DTI closely. Many lenders stick to a 43% limit for qualified mortgages.
Tip: If your DTI is high, focus on paying down existing debts before applying for new ones.
- Home Loans: Mortgage lenders care more about your ability to repay than your past behavior.
- Debt Consolidation Loans: Lenders want to see that you won’t be overextended.
- Large Loans: For big financial commitments, a healthy DTI is crucial.
Example: If you’re eyeing a new home, track your DTI closely. Many lenders stick to a 43% limit for qualified mortgages.
Tip: If your DTI is high, focus on paying down existing debts before applying for new ones.
When Does Your Credit Score Matter More?
- Credit Card Applications: Issuers prioritize your credit history over your income.
- Auto Loans: While DTI matters, a low score can spike your interest rate.
- Rental Applications: Many landlords check credit scores to gauge reliability.
Tip: Pay bills on time, keep credit utilization low, and don’t open new accounts impulsively.
So, Which One Should You Focus On?
Both your DTI and credit score tell important parts of your financial story. Understanding how lenders weigh each one can help you plan for future borrowing needs.
| Metric | Strengths | Weaknesses |
| Debt-to-Income | Crucial for mortgages; shows real affordability | Ignores credit behavior nuances |
| Credit Score | Key for credit cards & auto loans; shows repayment habits | Doesn’t reflect current income |
Making this decision can feel overwhelming, especially if you’ve been juggling bills. Share your story with me in the comments—what financial challenges have you faced, and how did you overcome them? Your experience might help someone else feel less alone. And don’t worry—you’re not alone. Let’s break it down together.
Making this decision can feel overwhelming, especially if you’ve been juggling bills. Share your story with us—what financial challenges have you faced, and how did you overcome them? Your experience might help someone else feel less alone. and feeling like you’re barely keeping your head above water. But don’t worry—you’re not alone. Let’s break it down together.
| Financial Goal | Focus On |
| Buying a Home | Lowering DTI |
| Getting a New Credit Card | Improving Credit Score |
| General Financial Health | Both (Pay Down Debt) |
- Planning to buy a house? Focus on lowering your DTI.
- Looking for better credit card offers? Improve your credit score.
- Just trying to improve overall financial health? Track both, but start with paying down high-interest debt to improve both metrics simultaneously.
Imagine This: Lisa and Tom both want a mortgage. Lisa has a 650 credit score but a 30% DTI, while Tom has a 780 score but a 45% DTI. Lisa gets approved with a decent interest rate; Tom doesn’t. Why? Lenders prioritize DTI for mortgages.
- Planning to buy a house? Focus on lowering your DTI.
- Looking for better credit card offers? Improve your credit score.
- Just trying to improve overall financial health? Track both, but start with paying down high-interest debt to improve both metrics simultaneously.
Imagine This: Lisa and Tom both want a mortgage. Lisa has a 650 credit score but a 30% DTI, while Tom has a 780 score but a 45% DTI. Lisa gets approved with a decent interest rate; Tom doesn’t. Why? Lenders prioritize DTI for mortgages.
Common Myths About DTI and Credit Scores
Understanding debt-to-income ratios and credit scores can be confusing, and many myths surround these important financial metrics. Here are a few common misconceptions:
- Myth: Checking your credit score frequently will lower it.
- Truth: Checking your own credit score is a soft inquiry and does not impact your score.
- Myth: A high income guarantees a good DTI.
- Truth: Even high-income earners can have a high DTI if their debt payments are significant.
- Myth: Lenders only care about your credit score.
- Myth: Paying off a loan always improves your credit score.
- Truth: Sometimes, closing an old loan can shorten your credit history and slightly lower your score.
Understanding the truth behind these myths can help you make better financial decisions.
Interactive Quiz: Test Your Knowledge
Think you know the difference between DTI and credit scores? Take this short quiz!
- What is considered a good DTI ratio for most lenders?
- A) Under 20%
- B) Under 36%
- C) Under 50%
- Which factor has a greater impact when applying for a mortgage?
- A) Credit Score
- B) Debt-to-Income Ratio
- C) Length of Credit History
- Checking your own credit score will:
- A) Lower your credit score
- B) Have no impact
- C) Improve your score
- Paying off an old loan always:
- A) Improves your credit score
- B) Lowers your DTI
- C) Has no effect
You can find the answers at the bottom of this article.
Final Thought:
If you found this post helpful, please share it with others who might be struggling with debt.
Taking control of your financial health can feel daunting, but you’re not alone. Every positive step you take, no matter how small, moves you toward a brighter financial future. Start today, and know that help is available if you need it.
Taking control of your financial health can feel daunting, but every step you take matters. Remember, your past doesn’t define your future—your actions today do. Stay strong, stay informed, and know that you have the power to rewrite your financial story.
Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.
Financial health isn’t a contest between your DTI and your credit score—they’re both important. But depending on your financial goals, one might matter more than the other. Need personalized guidance? Reach out to Damon Day, a trusted debt coach at DamonDay.com, for expert, tailored advice.
And remember, I’m Steve Rhode, the Get Out of Debt Guy. Managing debt isn’t about shame or blame—it’s just math wrapped in emotion. Track your spending, make a plan, and stay informed by subscribing to GetOutOfDebt.org for more practical, compassionate advice.
Answers:
1) B – Under 36%
2) B – Debt-to-Income Ratio
3) B – Have no impact
4) B – Lowers your DTI
