Explaining the USDA’s DTI Ratio
USDA loans are a valuable form of home financing that can help you achieve homeownership more easily and cheaply, but you’ll need to meet eligibility requirements. For example, the home must be in a USDA-approved rural or suburban location, your household income must not exceed 115% of the area's median income, and you often need a credit score of at least 640.
Additionally, your lender will look closely at your debt-to-income (DTI) ratio, which indicates the percentage of your earnings you use to pay your debts every month.
Read on to learn more about USDA debt-to-income ratio rules, USDA DTI limits, factors that impact DTI approval, ways to decrease your DTI, and more.
Your DTI is a snapshot of how much of your monthly gross income goes toward paying debts.
“Lenders use it to gauge if you can handle a mortgage payment without stretching your budget too thin,” says Steven Glick, director of mortgage sales for HomeAbroad.
A higher DTI ratio means more of your monthly income goes toward obligations like housing expenses, student loans, car payments, and other costs. Lenders want to ensure you can comfortably repay the amount you plan to borrow. Your DTI ratio is a good way for your lender to quantify that.
The typical maximum DTI allowed for USDA loans is 41%, although it’s possible to exceed that number and still obtain a USDA-backed loan (more on how later).
“USDA loans are intended for low-to-moderate income buyers in rural areas, so lenders may be even more wary of DTI numbers than lenders of other types of loans. That’s because USDA financing is typically made to buyers who have limited credit histories and/or debt loads,” says Dennis Shirshikov, professor of economics and finance at City University of New York/Queens College.
Here’s how to calculate your DTI ratio: First, determine how much you and any co-borrower on your USDA loan earn in a month. Divide your total monthly debt payments by your gross monthly income before taxes (ensure you use the amount you receive before your company takes out health care costs or retirement savings, not the amount that you actually take home every month). Then, multiply that number by 100 to get a percentage.
For example, if you pay $1,500 in debts monthly and earn $5,000 per month, your DTI ratio is 30%.
Lenders will look closely at two separate DTI ratios related to your finances: your front-end ratio and your back-end ratio, which we’ll cover next.
Your front-end ratio includes only housing-related expenses, such as principal, mortgage interest, property taxes, homeowners insurance premiums. (Principal, interest, taxes, and insurance is often called a PITI ratio.) If applicable, your front-end ratio may include HOA dues, condo fees, or special assessments.
Let’s say your housing-related costs add up to $1,200 a month and you earn $5,000 monthly. In this case, your front-end DTI ratio is 24%.
Lenders generally determine that you can repay your loan if your housing expenses will not exceed 29% of your repayment income, but some allow it to stretch to 34%.
The second DTI number, called the back-end ratio, also referred to as the “bottom ratio” or “total debt (TD) ratio,” includes all monthly recurring debt, including:
Some bills you pay every month aren’t included in your back-end DTI or total DTI ratio, including:
“Your back-end ratio provides a broader view that lenders use to assess your total financial obligations,” notes Certified Financial Planner, Jason Ball.
For example, if your debts amount to $1,800 with a $5,000 monthly income, your back-end DTI ratio would be 36%, still below the 41% maximum DTI allowed for most USDA loans.
Let’s look at a more detailed example to get a better understanding of how DTI works with USDA loans.
Imagine that your annual gross household income is $60,000, which means your gross monthly income is $5,000. Let’s assume you’re purchasing a $150,000 home with a 30-year USDA loan at a fixed 4.5%interest. Your monthly principal and interest payment would be about $768.
We’ll then add estimated monthly amounts for property taxes and homeowners insurance, along with the monthly charge for USDA mortgage insurance premium. The total monthly housing payment comes out to about $1,025 per month, or 20.5% of your gross monthly income of $5,000. Consequently, your front-end DTI ratio would be below the 29% limit for most USDA loans.
Let’s also assume you have a $300 a month car payment and owe $400 a month in student loans. That puts your total major monthly debts at about $1,725, leaving you with a back-end DTI ratio around 34%, also below the 41% max allowed.
But what happens if your ratios are higher than what the USDA typically wants to see?
The good news is that it’s still possible to obtain a USDA-backed loan even if your DTI ratios exceed these basic benchmarks.
Borrowers who have strong compensating factors may be able to get a USDA loan despite having higher DTI ratios, or positive attributes that help convince underwriters you have the willingness and ability to repay a mortgage loan. Compensating factors can include things like:
If you have sufficient compensating factors, you may be eligible for a DTI waiver, which allows lenders to lend to you.
“With strong compensating factors, you may obtain loan approval with a back-end ratio as high as 44%,” Glick says. “Aim for the standard 29% and 41% to stay in the safe zone, but I would recommend keeping your back-end closer to 36% or lower. This gives you breathing room for unexpected expenses, like car repairs or medical bills, which is especially important for rural borrowers who might not have quick access to extra funds.”
Ball agrees. “Just because you can borrow up to the maximum amount and can be approved at a DTI of 41% doesn’t mean that should be your goal. Keeping your DTI lower means more financial flexibility, less stress, and a stronger path to long-term stability,” he says.
Meeting the DTI requirement isn’t the only eligibility rule that applies to USDA loans. Yes, the USDA and lenders closely examine your repayment income to ensure you can handle your new monthly mortgage payment. But they also consider your household income in relation to where you’re buying. Generally, you can’t exceed 115% of the median income for your area.
Additionally, you’ll need to show a stable, reliable income history over the past 24 months. The property you’re buying must be used as your primary residence — vacation homes and rental properties aren’t eligible. You must also be either a U.S. citizen, non-citizen national, or qualified legal resident.
Your lender will also evaluate your credit score. While the USDA doesn’t establish an official minimum credit score requirement, most lenders offering USDA loans set their own credit score standards. Aim for a credit score of at least 640 or higher to qualify for financing.
“Both credit score and DTI are important to lenders, but when it comes to the minimum requirements for USDA loans, DTI is a little bit more important than your credit score. That’s because USDA loans are designed to help borrowers who may not have the best credit but have proven to manage their debts relatively responsibly,” Shirshikov points out. “A high DTI ratio coupled with a low credit score can make it more difficult to qualify because of what the lender perceives as a risk of potential financial distress. But if you have a low DTI, it can offset the effect of a lower credit score to some extent.”
Consider the following to decrease your DTI and improve your odds of getting loan approval:
1. Can I qualify for a USDA loan if my DTI exceeds 41%?
You may be able to qualify with a DTI over 41%, although it’s not guaranteed. You’ll probably need a DTI waiver and strong compensating factors like a higher credit score, cash reserves, and/or stable employment.
2. How do student loans affect my DTI calculation?
Student loans get factored into your back-end DTI as a monthly debt obligation. For fixed-rate loans, lenders use the payment shown on your credit report or loan documents. For non-fixed loans like income-based repayment plans,USDA rules require using the greater of the credit report payment or 0.5% of your loan balance. For instance, a $40,000 student loan with no fixed payment might count as $200 per month (0.5% of $40,000). This can increase your DTI, but paying down student loans or documenting a lower fixed payment can help keep your DTI ratio in check.
3. Are any tools available to calculate my DTI?
You can find many free online tools and calculators online to help determine your debt-to-income ratio. Mortgage lenders and financial companies often provide calculators and tools on their websites.
