Understanding Debt-to-Income (DTI) Ratio
Your Debt-to-Income (DTI) ratio is a key metric lenders use to assess your ability to manage monthly payments. It compares your total monthly debt obligations to your gross monthly income.
DTI Requirements for HELOCs
- Below 36% DTI: Excellent - best rates and easy approval
- 36-43% DTI: Good - most lenders will approve
- 43-50% DTI: Challenging - limited lender options
- Above 50% DTI: Very difficult to qualify
Front-End vs. Back-End DTI
Front-End DTI: Only housing-related expenses (mortgage, insurance, taxes) divided by income.
Back-End DTI: All debt payments (housing + credit cards + loans + HELOC) divided by income.
Lenders typically focus on back-end DTI when evaluating HELOC applications.
How to Improve Your DTI
- Pay off high-interest credit cards and personal loans
- Increase your income through raises, bonuses, or side work
- Avoid taking on new debt before applying
- Consider a co-borrower with additional income
What Counts as Debt?
- Mortgage payments (principal, interest, taxes, insurance)
- Credit card minimum payments
- Auto loans and leases
- Student loans
- Personal loans
- Child support and alimony
Expert Tips for Smart Borrowing
Pay Off Small Debts
Before applying, pay off small monthly debts like a $50/mo store card. Eliminating a monthly payment helps DTI more than paying down a large loan partially.
Boost Income on Paper
Ensure all income is documented. Bonuses, overtime, and side-hustle income often need a 2-year history to be counted by underwriters.
Avoid New Debt
Do NOT buy a car or furniture before your HELOC closes. A new monthly payment showing up on your credit report can kill the deal instantly.
Co-Borrower Power
Straddling the line? Adding a spruce or partner as a co-borrower can double the income used in the calculation, slashing your DTI ratio.