The Quick Read: Lenders divide your total monthly debt payments by your gross monthly income, which is your pay before taxes. On a refinance, the payment on the new loan goes into the ratio, not your old one. Other debts come from your credit report and statements. Everyday costs like groceries and utilities are left out.
The result is one of several gates. Loan-to-value, credit score, reserves, and the automated underwriting finding all weigh in too.
Refinance savings and break-even estimate
The starting figures are an example value with a balance in proportion and a placeholder for costs. Replace them with yours, and enter the current rate from your statement.
Editable benchmark: 7.40% as of October 15, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $245,000 current balance, a current rate you enter and a remaining term seeded at twenty-five years, closing costs seeded at $5,000 as an editable placeholder (not a fee quote) and rolled into the new loan, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The new rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a refinance quote; a refinance is priced by the lender at lock, and the current rate, the remaining term and the closing costs are figures you enter. The current payment is estimated from the balance, the current rate and the remaining term; the break-even divides the closing costs by the monthly saving and ignores the interest effect of a longer term. On the VA IRRRL the funding fee is added to the loan unless the veteran is exempt. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages; Lendmire is a broker, never the lender.
How Is the Ratio Actually Calculated?
You add up the monthly debts the lender counts. Then you divide by your gross monthly income. That is the whole formula.
Freddie Mac's guide frames it the same way: monthly housing expense plus monthly liability payments, divided by stable monthly income.
Picture a homeowner whose monthly obligations, including the proposed mortgage payment, equal about 40% of gross monthly income. That is a 40% ratio. The percentage is what gets compared to the limit.
Here is the part that surprises people. The housing piece is built from the new loan. If the refinance changes the term, the balance, or the payment, the ratio changes with it. Brokers see this constantly. A borrower assumes the old payment counts. It does not.
What Counts as Debt (and What Doesn't)?
Counted debts are the recurring obligations on your credit report and in your documents. Everyday living costs are not counted.
Under the Fannie Mae Selling Guide, the list covers:
- Installment loans, such as auto loans
- Student loans
- Revolving accounts, such as credit cards
- Leases
- Alimony, child support, and separate maintenance
- The new housing payment and related housing costs
Groceries, utilities, phone bills, and insurance premiums outside the mortgage payment do not count. Skip the urge to list them.
One timing rule helps. An installment loan with ten or fewer payments left is generally excluded. The guide adds a caveat: it can still count if the payment significantly affects your ability to pay.
How Do Lenders Measure Your Income?
Lenders use stable, documented monthly income, before taxes. They need to verify it, not just hear about it.
Typical documents include:
- Pay stubs and W-2s
- Traditional personal-income documentation and bank statements
- A current mortgage statement
- Student loan statements
- Divorce decree or support-order documents, if they apply
Self-employed borrowers and people with bonus or commission pay usually face a closer look at how steady that income is. Income that is documented and likely to continue counts. Income that is irregular or short-lived may be averaged or left out. The details differ by loan program and by lender.
Take-home pay is not the measure. Gross is.
What Debt-to-Income Limits Apply on a Refinance?
There is no single national cap. The Consumer Financial Protection Bureau notes that limits differ by loan product and by lender. They also depend on how the file is underwritten and the type of refinance.
For conventional loans, here is how Fannie Mae frames it in Selling Guide B3-6-02:
| Factor | What the agency says |
|---|---|
| Automated underwriting (DU) | 50% maximum |
| Manual underwriting | 45% maximum |
| Manual, above 36% | Credit score and reserve requirements apply |
Across the wholesale conventional programs Lendmire places files with, the automated finding governs most files, with a total ratio ceiling of 50%. Manually underwritten loans run to 36% or 45%. Above 36%, the credit score and reserve requirements in that Fannie Mae guide come into play. All of it is subject to lender guidelines and full file review.
Past those ceilings, the loan is not eligible for delivery to Fannie Mae. Freddie Mac says the same for manual files above 45%.
Why Isn't There a Hard Federal Cap?
You may have heard of a 43% federal limit. That fixed cap was removed from the General Qualified Mortgage definition and replaced with price-based thresholds. Lenders must still verify income and debts and consider your ratio. Agency and program limits still apply on top.
Does Cash-Out Change the Ratio Rules?
Yes, often. Cash-out refinances tend to face tighter debt-to-income treatment than rate-and-term loans. Freddie Mac says the ratio should not exceed 36% for cash-out refinances except in rare cases. It says the same for two- to four-unit properties and for borrowers who repeatedly add debt and then refinance. Fannie Mae notes that its automated maximum may be lower for cash-out. That page is an archived version, so confirm the current wording with your loan officer. On the pricing side, the CFPB explained that it moved away from a fixed ratio cap because price says more about ability to repay than the ratio alone.
On the rate-and-term side, the wholesale programs allow 95% loan-to-value on a one-unit principal residence. That rises to 97% where the existing loan is agency-owned and the first-time-buyer program allows. The new loan pays off your first mortgage, closing costs, and a purchase-money second lien, with only incidental cash back. Pay off any other second lien and the file shifts toward cash-out treatment. That is the cleanest line between the two.
Conventional cash-out loans cap at 80% loan-to-value on a one-unit principal residence. Seasoning rules apply too.
Can Paying Off Debts at Closing Help?
Often it can. A revolving balance paid off at or before closing does not need a payment counted, and the account does not have to be closed.
The Fannie Mae guidance on debts paid at closing also lets you exclude an installment loan paid down to ten or fewer remaining payments. That is why debt consolidation can help a borrower qualify.
There is a tradeoff. Rolling card balances into the new loan can turn the file into a cash-out refinance, with its tighter ratio and leverage treatment. Run it both ways before you commit. Sometimes paying cards from savings keeps the file in the simpler lane. Sometimes the consolidation is worth the stricter rules.
To see how a rate-and-term file is structured, Lendmire's refinance programs page lays out the options.
Do Streamline Refinances Skip the Ratio?
Sometimes, but not always. Streamlines for existing government loans are lighter, not blank.
The FHA Streamline requires an existing FHA loan that is current. It also requires a net tangible benefit, meaning the refinance has to measurably help you. HUD's streamline page limits cash back to $500. On the programs Lendmire arranges, the FHA Streamline carries no appraisal and a limited credit review.
The VA IRRRL works for an existing VA loan. It carries a 0.5% funding fee unless you are exempt, no VA appraisal, and a net tangible benefit. Seasoning is the later of 210 days and six payments. Whether credit underwriting can be skipped depends on conditions in VA's rules, not on a blanket pass.
So a streamline is not "no questions asked." Lenders still look at your payment history, and your file may still be reviewed.
What Changes Between Application and Closing?
New debt can undo a good ratio. Fannie Mae requires the lender to recalculate your ratio if extra liabilities surface after the underwriting decision and before closing.
If the recalculated figure lands above the 45% manual or 50% automated limit, the loan is not eligible for delivery to Fannie Mae. So hold off on a car loan, a new card, or a furniture financing plan until you close. Also expect your credit to be checked again.
Special Situations That Move the Number
Several debt types have their own rules:
- Student loans. A borrower on an income-driven plan with a documented zero-dollar payment may be qualified at zero. Deferred or forbearance loans get a payment calculated under the guide. Fannie Mae's FAQ says a payment on the credit report may be used, or the latest statement if the report is wrong.
- Debts paid by others. These can be excluded under documented conditions.
- IRS installment agreements. The payment can be excluded if the agreement meets the guide's terms. Fannie requires an approved agreement plus proof you are current.
- No credit score. The maximum ratio may be lower.
- High-LTV refinances. Fannie has no maximum ratio unless the Alternative Qualification Path is used.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
Gross monthly income: Your income before taxes and deductions.
Front-end ratio: Your housing payment alone divided by gross monthly income.
Back-end ratio: All monthly debts, housing included, divided by gross monthly income. This is the number most people mean by debt-to-income.
Net tangible benefit: A measurable gain from the refinance, required on government streamlines.
Automated underwriting: Software that weighs your whole file and returns a finding. It usually decides conventional files.
Seasoning: The waiting period a loan or ownership must meet before a refinance.
How to Improve Your Ratio Before You Apply
Move the numerator down or the denominator up. Those are the only levers.
1. Pay off revolving balances before closing. The payments drop out of the calculation.
2. Pay installment loans down to ten or fewer remaining payments, where it makes sense.
3. Avoid new credit until after closing.
4. Add a co-borrower with documented income, if one is truly on the loan. Their debts and income both count.
5. Compare terms. A longer term lowers the monthly payment used in the ratio, though it changes total cost over the life of the loan.
The ratio is not the only gate. A strong score and reserves can offset a higher ratio on automated files. A thin file with a high ratio gets less room. Everything stays subject to lender guidelines and full file review, and none of this is a commitment to lend.
Frequently Asked Questions
Is debt-to-income calculated differently for a refinance than a purchase?
Not in the formula. It is still monthly debts over gross monthly income. What changes is the type of refinance. Cash-out files often face tighter ratio treatment, and government streamlines can be lighter on credit review.
Do I use my old mortgage payment or the new one?
The new one. Underwriters review your file on the proposed housing payment for the refinanced loan, along with your other counted debts.
Does a deferred student loan count?
Yes. Under Fannie Mae rules, the payment must be handled under its debt guidelines. A documented $0 income-driven payment may be used as $0. Deferred balances generally get a calculated payment.
Do utilities, groceries, or cell phone bills count?
No. Those living costs are not in the debt list. Counted items are installment, student, revolving, lease, and support obligations, plus the housing payment.
Is there a federal 43% cap?
No. That cap was removed from the General QM definition. Program and agency limits still apply, and they vary by loan type.
Next Step
If you are weighing a refinance and want the break-even run on your own numbers, Lendmire can help you compare the programs on the same home. You can request a scenario review when you are ready.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Freddie Mac Guide Section 5401.2
2. Fannie Mae Selling Guide B3-6-05: Monthly Debt Obligations
3. Consumer Financial Protection Bureau: What is a debt-to-income ratio?
4. Fannie Mae Selling Guide B3-6-02: Debt-to-Income Ratios
5. Fannie Mae B3-6-02 (05/04/2022 archive)
6. CFPB
7. Fannie Mae Selling Guide B3-6-07: Debts Paid Off at or Prior to Closing
8. HUD: FHA Single Family Streamline
This article is part of Lendmire’s Refinance series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Does a Cash-Out Refinance Cost More Than a Plain Refinance? · Does a Cash-Out Refinance Count as Income When You Apply Again? · How Much Cash to Take on a Cash-Out Refinance to Clear Card Debt
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.