Debt to Income for a Second Home
What debt-to-income means, how it is calculated, and why the 43 percent figure people quote is no longer the federal standard it is often described as.
Written by Bryan Piccolomini, NMLS #228509, a mortgage loan originator with Residential Mortgage, LLC (NMLS #167729), a wholly owned subsidiary of Northrim Bank. Loans are originated through Residential Mortgage, LLC.
How the number is built
Two inputs, one division.
- Monthly debt payments. The proposed payment on the new property, the payment on the home you already own, and the recurring obligations that show on your credit report.
- Gross monthly income. Income before tax, as it can be documented for the loan.
Divide the first by the second. The debt-to-income calculator on the calculators page does exactly this from figures you type in, and shows the result as a percentage. It applies no threshold and makes no judgment, because the threshold is not a fixed thing.
The 43 percent number, accurately
Most articles on this subject still cite 43 percent as the federal limit. That was true of the General Qualified Mortgage definition as it originally stood, and it is no longer the standard.
The Consumer Financial Protection Bureau issued a final rule on December 10, 2020, published in the Federal Register on December 29, 2020, that in the Bureau's own words removes the General QM loan definition's 43 percent DTI limit and replaces it with price-based thresholds
. The same rule removed appendix Q, the prescriptive income and debt calculation appendix that went with it. The mandatory compliance date was later delayed to October 1, 2022, and from that date the price-based definition is the one a creditor has to satisfy to originate a General QM.
The practical consequence is straightforward. Debt-to-income still matters a great deal, and lenders and the automated underwriting systems still evaluate it closely. But a single national percentage that a borrower either clears or fails is not how the General QM standard works now, and quoting one as though it were is inaccurate.
Source: CFPB, General QM Loan Definition final rule.
Why second home files feel tighter
On a primary residence purchase, the payment you are replacing often drops out of the calculation. On a second home purchase it does not. You are carrying both. That single difference is why buyers who comfortably qualified for their current home sometimes find the second purchase harder, with no change in their income.
It is also why the order of operations matters. Paying off a car loan can move the ratio more than a larger down payment does, because it removes a monthly obligation from the numerator rather than reducing the loan slightly.
What actually moves the number
- Retiring an installment debt entirely. Removes the whole monthly payment from the calculation. Paying a balance down without closing out the payment often does less.
- Documented income that is not currently counted. Bonus, commission and self-employment income have specific documentation rules. Income that exists but cannot be documented in the form the program requires does not help the ratio.
- The size and structure of the new loan. Which is where the down payment decision and the ratio meet.
Self-employed and complex income files are their own subject, because how the income is calculated is frequently the whole question. That is worth raising in the first conversation rather than after an application is in.
Run yours before you assume
The calculator gives you the arithmetic in a few seconds. Take the result to a conversation rather than to a comparison table. What a given ratio means depends on the rest of the file, and that is a judgment nobody can make from a percentage alone.
Common questions
What is a good debt-to-income ratio for a mortgage?
There is no single figure that applies to everyone. Lower ratios give an underwriter more room, but what is workable depends on the loan program, the property, and the rest of the file. The CFPB removed the General Qualified Mortgage 43 percent limit in its December 2020 final rule and replaced it with price-based thresholds; a later rule moved the mandatory compliance date to October 1, 2022.
Is the 43 percent debt-to-income rule still in effect?
Not as the General Qualified Mortgage standard. The CFPB's final rule removed that limit and appendix Q and replaced them with a price-based approach. Debt-to-income is still evaluated closely in underwriting; it simply is not governed by that single federal percentage any more.
Does my current mortgage count against me?
On a second home purchase, yes, in full. That is the main reason the ratio is usually the deciding number on these files.
Does paying off a credit card improve my ratio?
It can, because it removes or reduces a monthly obligation. Retiring an installment loan outright generally moves the number more than reducing a balance does, since the whole payment leaves the calculation.
Related guides
Get a read on your own ratio
Run the calculator, then have Bryan look at what the number means against the rest of your file.