3 steps to calculate your debt-to-income ratio

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

Your DTI helps lenders determine whether you’ll be able to pay back your loan on time and make your monthly payments. The higher your DTI, the more you may struggle to pay your monthly debts because there is less room for error in the event of an emergency or poor budgeting. The lower your DTI, the more lenders see you as a reliable borrower.

Before taking out a loan, calculate your debt to income ratio, or DTI. That way you have an understanding of what lenders are looking at when determining how risky a borrower you are, and whether you have enough money each month to make your monthly payments.

How to calculate your debt-to-income ratio

To calculate debt to income ratio, first add up all your monthly debt payments. Separately, add up your total gross income, or what you earn before taxes are taken out. Next, divide your debt by your gross monthly income and you’ll get your debt-to-income ratio.

Example DTI calculation

  1. Add up your monthly debts:
  • Mortgage: $1,600
  • Auto loan: $300
  • Minimum credit card payments: $300
  • Student loan: $200

Total monthly debts: $2,400

2. Add up your monthly gross income:

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

Total monthly gross income: $6,000

3. Divide your monthly debts by your monthly gross income. For this example, you would divide $2,400 by $6,000. Your total DTI would be 0.40, or 40 percent.

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, this applies to 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, which means 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.

Keep in mind that the requirements are different for each lender and what type of loan you’re taking out. Your DTI for a mortgage might not be the same as a personal loan.

Why your debt-to-income ratio is important

To lenders

Your debt-to-income ratio is an important component in determining your overall risk. It can tell you how much of your money is going toward outstanding debt. It might even help you adjust your budget to put more money into paying off debt so you can eventually lower your DTI and have a better chance of being approved for a loan at a good interest rate.

For lenders, a low DTI shows that you don’t carry much debt baggage. It’s an important risk measurement, just like your credit score. Both are used to determine if you’re worth lending to.

On many loan applications, you’ll see questions about your income and monthly debt. The type of loan you want, the amount you want to borrow, the lender you choose and your income, debt and credit score are all taken into account by loan underwriters. Since there are many variables, you should consider comparing lenders to see which ones will offer you the lowest interest rates and best repayment terms.

For your credit score

While your debt-to-income ratio doesn’t impact your credit score or appear on your credit report, this can still affect your credit utilization, which can in turn affect your credit score. Your credit utilization is important because it is the amount of revolving credit you’re using against the total amount of credit you have available to you. If you have a higher credit utilization percentage, it can lower your credit score since it indicates that the amount of debt you have is close to your credit limit.

3 quick tips to improve your debt-to-income ratio

  • Increase your income by negotiating a raise at your job, finding a higher-paying position, working overtime or creating a side hustle.
  • Try to pay your debts off, especially any you are close to eliminating.
  • Consider using a debt consolidation loan; it might be able to lower your credit card payments.

Next steps

Do your best to lower your DTI as much as you can before taking on new debt, like a new car loan. It will not only help you qualify for a loan, but may also help you get a lower interest rate. You can also improve your DTI by increasing your income or consolidating debts at a lower interest rate.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Edited by
Associate loans editor