When you're applying for a mortgage, there's one number lenders care about almost as much as your credit score: your DTI, or Debt-to-Income ratio. It might not sound glamorous, but understanding this simple formula can be the key to getting approved—and affording the home you really want.
Let's break it down.
What is DTI?
Your Debt-to-Income (DTI) ratio compares your monthly debt payments to your gross monthly income (what you make before taxes). It helps lenders assess whether you can realistically take on a mortgage, based on what you already owe.
The Formula:
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) x 100
What Counts as “Debt”?
Debt includes recurring payments like:
- Student loans
- Auto loans
- Credit cards (minimum monthly payments)
- Personal loans
- Existing mortgages or rent
- Alimony or child support (if applicable)
It does not include utilities, groceries, or other non-debt expenses.
Why does DTI Matter?
Lenders use your DTI to evaluate how much risk they're taking on. A lower DTI means you have more room in your budget to handle a mortgage—making you a stronger candidate for approval (and often, better loan terms).
What's a "Good" DTI?
Different lenders have different thresholds, but here’s a general rule of thumb:
- 36% or lower – Great shape. This is the sweet spot for many traditional lenders.
- 37%–43% – Often still acceptable, especially with strong credit.
- Over 43% – Riskier territory. You may face higher interest rates or limited loan options.
Some loan programs allow for DTIs as high as 50%, but they may come with added requirements.
Can You Lower Your DTI Without Paying Off All Your Debt?
That’s where the Knock Bridge Loan comes in.
If you're a homeowner looking to buy before you sell, your current mortgage often weighs heavily on your DTI. That additional debt can limit your buying power.
The Knock Bridge Loan:
- Removes your current mortgage from your DTI calculation, often leading to better mortgage terms
- Allows you to use bridge loan funds to pay off debts, helping lower your DTI even further
- Covers the down payment of up to 50% of the purchase price of your new home
- Helps you make a competitive, non-contingent offer
- Lets you move now and sell later, reducing pressure and overlap
In short, the Knock Bridge Loan can improve your DTI ratio and give you the financial flexibility to buy the home you want on your timeline.
What's Next?
Your DTI is an important calculation in your homebuying journey. It tells lenders how comfortably you can take on a mortgage, and it can be the deciding factor between approval or denial.
If your current home is holding you back, the Knock Bridge Loan could be your solution to move forward with confidence.
Talk to your lender or agent today to see if you qualify for a Knock Bridge Loan or visit qualify.knock.com.