What should you do once you know your debt-to-income ratio?

After calculating your debt-to-income ratio (DTI), inquire with the lenders you are considering if you haven’t yet done so about their requirements. If your DTI is at or below their threshold and you meet the other eligibility criteria, you can move forward with the application process. Otherwise, you want to hold off until you can pay down your balances and get your DTI to an acceptable level. The lender may allow a much higher DTI than 50 percent, which is considered risky. So, even if you’re eligible for a loan, you should still focus on minimizing the balances owed to lenders and creditors.

What should you do if your debt-to-income ratio doesn’t meet a lender’s requirements?

If your DTI disqualifies you for a loan, consider taking the necessary steps to reduce it. Evaluate your spending plan, reduce expenses and use these funds to make extra payments towards your debt each month. It’s equally important to stop using credit cards or opening new credit accounts while paying down balances. Be sure to recalculate your DTI regularly so you’ll know when it’s at a percentage that’s acceptable to the lender.

Do current lenders need to know if your debt-to-income ratio changes?

It is not necessary to notify lenders if your DTI changes. However, credit card issuers may calculate this figure if you apply for a credit limit increase. Current lenders will also compute your DTI if you apply for an additional debt product.

3 Steps To Calculate Your Debt-To-Income Ratio

5 min read Published April 14, 2023

Written by

Dori Zinn

Edited by

Aylea Wilkins

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Your debt-to-income ratio (DTI) is your total monthly debt payments divided by your total gross monthly income.

Your DTI helps lenders determine if you will be able to make your monthly payments. The higher your DTI, the more you may struggle to cover debts and other expenses. The lower your DTI, the more lenders see you as a reliable borrower.

Before taking out a loan, calculate your debt-to-income ratio to be sure you have enough money each month to make your payments.

Step one: Add up your monthly debts

Start by adding up all your debts listed on your credit report, including:

Auto loan payments
Child support and alimony payments
Credit card payments
Home equity loan payments
Home equity line of credit payments
Line of credit payments
Mortgage payments
Personal loan payments
Store card payments
Student loan payments
Timeshare payments

In addition to your personal debts, you should also include any joint accounts or co-signed loans.

Use your monthly payment for fixed-rate loans like personal loans and auto loans. Use your minimum monthly payment for variable-rate accounts like credit card payments or a home equity line of credit.

For your mortgage, calculate the full PITI (principal, interest, taxes and insurance). This will be your regular monthly payment if you escrow your taxes and insurance. If you don’t escrow, your lender will likely take your annual tax and insurance payments, divide them by 12 and include them as part of your mortgage payment for purposes of your DTI calculation.

Here is an example of what it could look like after considering these monthly debts:

Mortgage: $1,600
Auto loan: $300
Minimum credit card payments: $300
Student loan: $200

Total monthly debts: $2,400

Step two: Add up your monthly gross income

Next, add up your monthly gross income. This should include wages from a more traditional job as well as any gig or freelance work you do. However, you do not need to include payments like alimony or child support unless you want that to be considered by the lender.

If you are a W-2 employee, documentation will likely come from your W-2 form and/or your last several pay stubs. If you are self-employed or have income from a side hustle, your lender will likely look at your business tax returns. If you have money coming in from a side hustle but don’t have a business tax return or other documentation, your lender may not allow you to use that income as part of your DTI calculation, though some may allow bank statements with regular deposits.

If you have properties you rent out, you need to include them in your income as well. The mortgage payments on your rental properties are included as part of your monthly debts, but you may not be able to use all of the rental income as part of your income calculation. Many lenders will only allow you to count 75% of the monthly rent towards income. That leaves a buffer for maintenance and vacancies.

Here is how those calculations could go:

Monthly gross income from day job: $5,000
Side hustle monthly gross income: $1,000

Total monthly gross income: $6,000

Step three: Divide your monthly debts by your monthly gross income.

For this example, divide your monthly debt payments ($2,400) by your total monthly gross income ($6,000). In this case, your total DTI would be 0.40, or 40 percent. To confirm your number, use a DTI calculator.

What is a good debt-to-income ratio?

The higher your DTI, the riskier you appear to lenders. Each lender has different DTI standards you must meet to qualify for a loan, but most lenders use a 43 percent DTI as a benchmark.

A DTI above 43 percent could make it more difficult for you to obtain a loan. In particular, qualified mortgages. In many cases, 43 percent is the highest DTI ratio a borrower can have and still be approved for a qualified mortgage.

Typically, a DTI of 50 percent or more is concerning. You don’t have much extra money to spend each month, so you’ll have a harder time making payments on a loan, let alone other expenses. If your DTI is between 36 percent and 49 percent, it’s good, but there’s still room for improvement. You might want to consider lowering your DTI before applying for a loan.

A DTI below 35 percent is good and manageable. It shows that you have enough money to take on new debt and pay it back on time. If an emergency came up, you most likely wouldn’t fall behind on payments.

The requirements differ for each lender and the type of loan you take out. The lender’s maximum DTI for a mortgage might not be the same as its maximum DTI for a personal loan.

Bottom line

Your DTI can make or break your chances at a loan. Do your best to lower your DTI as much as possible before taking on any new debt.

It will not only help you qualify for a loan but may also help you get a lower interest rate. You can improve your DTI by lowering expenses to make higher debt payments, increasing your income or consolidating debts at a lower interest rate.

Frequently asked questions

After calculating your debt-to-income ratio (DTI), check the lender’s requirements. If your DTI is at or below the lender’s threshold and you meet other eligibility criteria, you can move forward with the application process. Otherwise, hold off until you can pay down your balances and get your DTI to an acceptable level. The lender may allow a much higher DTI than 50 percent, which is considered risky. So, even if you’re eligible for a loan, you should still focus on minimizing the balances owed to current creditors.
If your DTI disqualifies you for a loan, you should focus on reducing it. Evaluate your spending plan, minimize expenses and use these funds to make extra payments towards your debt each month. Stop using credit cards or opening new credit accounts while paying down balances. Be sure to recalculate your DTI regularly so you’ll know when it’s at a percentage that’s acceptable to the lender.
It is not necessary to notify lenders if your DTI changes. However, credit card issuers may calculate this figure if you apply for a credit limit increase. Current lenders will also compute your DTI if you apply for an additional debt product.
Income is not included in any credit report, so your DTI does not impact your credit score. However, if you have a large amount of debt or a high credit utilization ratio — meaning your accounts are maxed out — your score may be negatively impacted even if your DTI is proportionately low.