Debt-to-income ratio is the share of your gross monthly income that goes to debt payments. Lenders add up your minimum payments on cards, student loans, car loans, and the proposed new loan, then divide by monthly income before taxes. Rent is not included in the debt figure for a mortgage application because the mortgage would replace it.
Someone earning $10,000 a month gross with a $450 car payment, $300 of student loans, and $150 of minimum card payments has $900 of existing debt, or 9% DTI. Add a proposed mortgage payment of $2,800 including taxes and insurance, and the total is $3,700, or 37%.
Most mortgage lenders prefer a total DTI at or below 36%, with the housing payment alone at or below 28%. Many approve up to 43%, and some programs go to 50% with strong credit and reserves. The lower the ratio, the better the rate and the smoother the approval.
For people with variable pay, how income is counted matters. Base salary counts fully. Bonuses, commissions, and RSU income usually count only if there is a two-year history, and the lender averages it. A recent raise or a new equity grant may not count at all yet.
The common mistake is buying at the maximum a lender allows. A 43% DTI on gross income can be 60% of take-home, which leaves little room for anything else. Setting your own limit based on net income, not the lender's limit based on gross, keeps the house from owning you.