For conventional loans, lenders want a front-end DTI under 28% and back-end DTI under 43%. FHA allows 31%/43%, VA focuses on back-end at 41%, and USDA allows 29%/41%. Lower DTI ratios improve your chances of approval and may qualify you for better rates.
Front-end DTI (housing ratio) includes only housing expenses (PITI) divided by gross income. Back-end DTI (total ratio) includes all monthly debt payments (housing + car loans + credit cards + student loans) divided by gross income. Lenders evaluate both ratios when qualifying you for a mortgage.
You can lower your DTI by paying off debts, increasing income, choosing a less expensive home, making a larger down payment, or extending the loan term. Paying off credit cards and car loans has the most immediate impact on your back-end DTI.
While DTI doesn't directly determine your interest rate, a lower DTI makes you a less risky borrower, which can help you qualify for better loan programs and rates. High DTI may limit you to certain loan products with higher rates.