Housing Counselor Certification (HUD) Practice Exam

What is the typical maximum debt-to-income ratio lenders prefer for loan approval?

1. 20%

2. 28%

3. 36%

4. 42%

The correct answer is: 36%

Lenders typically prefer a maximum debt-to-income (DTI) ratio of around 36% for loan approval. This percentage indicates that no more than 36% of a borrower's gross monthly income should go towards servicing debt, which includes housing costs (like mortgage payments) and other monthly debt obligations (such as car loans, credit card payments, and student loans). The rationale behind this preference is to ensure that borrowers have sufficient disposable income left for other living expenses, reducing the risk of default. While some lenders may stretch this percentage to as high as 42% in certain circumstances, maintaining a DTI of 36% is generally seen as a safe threshold. This guideline helps lenders evaluate a borrower's financial stability and ability to manage additional debt responsibly. In contrast, lower percentages like 20% or 28% might be too restrictive for many borrowers, potentially limiting access to home financing without sufficiently reflecting their creditworthiness.