How to Calculate Your Debt-to-Income (DTI) Ratio: A Complete Guide
Debt-to-income (DTI) ratio represents your monthly debt payments divided by your gross monthly income, expressed as a percentage. This financial metric helps lenders evaluate your ability to manage monthly payments and repay debts.
How to Calculate DTI
Use this simple formula: (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100 = DTI%
Example: If you pay $1,800 in monthly debts and earn $6,000 monthly before taxes, your DTI is 30% ($1,800 ÷ $6,000) × 100 = 30%
Include These Monthly Debt Payments:
- Rent or mortgage
- Auto loans
- Student loans
- Credit card minimums
- Personal loans
- Home equity payments
- Court-ordered payments (child support, alimony)
Don't Include Regular Expenses:
- Groceries
- Utilities
- Insurance
- Phone bills
- Child care
- Entertainment
- Transportation costs
Count All Income Sources:
- Full-time salary
- Part-time wages
- Freelance income
- Bonuses
- Child support/alimony received
- Social security benefits
- Rental income
Understanding Your DTI Ratio
Less than 36%: Healthy debt level; good chances for loan approval 36-42%: Moderate concern; may face lending restrictions 43-50%: High risk; limited borrowing options Over 50%: Critical level; consider debt relief options
Impact on Lending
- Lenders use DTI to assess borrowing risk
- Each lender sets unique DTI requirements
- Personal loans may allow higher DTI than mortgages
- DTI doesn't affect credit scores
How to Lower Your DTI
- Increase Income:
- Start a side hustle
- Sell unused items
- Take on additional work
- Reduce Debt:
- Pay down credit card balances
- Clear installment loans
- Avoid new debt
- Restructure Debt:
- Refinance at lower rates
- Consolidate multiple debts
- Negotiate payment terms
Remember: Keep your DTI as low as possible to maintain financial health and ensure better lending options in the future.