What Is My Debt-To-Income Ratio? (2024)

You’ve kept a steady job over the last few years and worked hard to improve your credit. Now you’re ready to submit that loan application. Or are you?

In addition to your job history and credit, lenders will consider another major measure of financial health: debt-to-income ratio, or DTI. Learn more about what your DTI means, how it’s calculated and how to get yours in great shape.

What Is Debt-to-Income Ratio?

Your debt-to-income ratio is a measurement lenders use to find out how much of your income goes toward paying off debt every month. It considers all your monthly debt payments in comparison to your gross monthly income, and is expressed as a percentage.

When you apply to borrow money, lenders like to see a low DTI. This is a strong indication that you have enough cash to make your payments on time every month. A low DTI is also a great sign that you’re in a solid place financially and can comfortably afford your lifestyle—whether or not you plan to borrow.

How to Calculate Debt-to-Income Ratio

To calculate your debt-to-income ratio, start by adding up all your monthly debt obligations. This includes revolving credit, such as credit cards and other lines of credit, as well as installment loanssuch as student loans, car loans and personal loans. You also should include any child support or alimony payments you’re responsible for making each month. Usually, you don’t need to consider other expenses such as food, utilities and insurance.

Once you have all your obligations tallied, divide that number by your gross monthly income (that’s what you earn before taxes, retirement contributions and other deductions are taken out). You’ll end up with a decimal fraction, which you can multiply by 100 to get your DTI percentage. The equation looks like this:

DTI = Monthly Debts / Gross Monthly Income

For example, say your debts are as follows:

• Credit Card A: $500
• Credit Card B: $350
• Auto Loan: $150
• Home Equity Line Of Credit: $200
• Student Loan: $400

That gives you a total of $1,600 in monthly obligations. Now say your gross monthly income is $5,000. You would calculate your DTI as follows:

$1,600 / $5,000 = 0.32

Multiply the result by 100 and you have a DTI of 32%. In other words, 32% of your gross monthly income goes toward paying back debt.

Keep in mind that even if your DTI is considered low, other monthly expenses can take a bite out of your budget. When borrowing money, it’s important to consider how these other costs could affect your ability to stay on top of payments.

Types of Debt-to-Income Ratios

Generally, the equation above gets you your general debt-to-income ratio. However, some lenders like to break this number down even further to find your front-end and back-end DTI. You’ll often come across these terms when applying for a mortgage.

Front-end DTImeasures your housing costs or potential housing costs only in relation to your income. Also known as the housing ratio, this calculation takes into consideration your monthly mortgage payment, private mortgage insurance and other costs associated with your home loan, divided by gross monthly income.

Back-end DTI is the more comprehensive calculation. This version of DTI not only looks at your housing expenses, but all debt obligations such as credit cards and loans, divided by gross monthly income.

What Is Considered a Good DTI Ratio?

What counts as a “good” DTI will depend on what type of loan you want. Some lenders allow a higher DTI, while others require a lower cut-off.

In general, lenders prefer that your back-end ratio not exceed 36%. That means if you earn $5,000 in monthly gross income, your total debt obligations should be $1,800 or less. However, some lenders might make an exception if you have excellent credit. In fact, it’s possible to qualify for a loan with up to a 50% DTI as long as you’re an otherwise highly qualified borrower.

Mortgage lenders, in particular, tend to have more hard-and-fast rules. They typically prefer a front-end DTI of 28% or less. That means your mortgage payments can’t be any higher than 28% of your gross monthly income. So if you take home $5,000 per month, your mortgage payments shouldn’t be any higher than $1,400.

On the other hand, conventional mortgagelenders, as well as FHA and USDA lenders, will typically allow a back-end DTI of up to 43%, giving your budget a little more wiggle room. VA loans usually require a back-end DTI of 41% or less.

Knowing your front-end and back-end DTI can help you figure out how much house you can afford. If you apply for a mortgage and the payments would cause you to exceed either of these DTI requirements, you may have to go with a smaller loan or could be denied a loan altogether.

How DTI Impacts Your Credit Score

Not only does your DTI impact your ability to secure a loan, it also indirectly affects your credit. That means even if you aren’t trying to borrow money right now, a DTI that’s too high could knock points off your credit score and make it tougher to secure an apartment or open a utility account.

The main reason DTI and credit are related is because the total amount of debt you owe affects approximately 30% of your FICO score.The lower the amount of debt you owe in relation to your available credit, the better for your score. Conversely, the more debt you have to your name, the worse its impact on your score. So if you have a high DTI, it follows that you are probably using a significant portion of your available credit.

DTI also can impact your credit if you owe so much that you aren’t able to keep up with payments. As the most heavily weighted factor in calculating your credit score, payment history makes up 35%. Just one missed payment can knock quite a few points off your score, so it’s important to keep your debt levels manageable.

How to Lower Your DTI Ratio

Generally, if you’re trying to lower your DTI, there are two things you can do: Increase your monthly income or decrease your outstanding debt. Here’s a closer look at how to accomplish each of those goals:

• Increase your monthly income. Increasing your income is easier said than done. Still, if lowering your DTI is a goal, finding ways to increase your pay is one way to do it. It might be time to negotiate a raise at work or take on a few extra hours of overtime. You also can turn a hobby or skill into a lucrative side hustle and bring in extra income on the side when your schedule allows it.
• Decrease your outstanding debt. Your other option is to get rid of some debt so that your monthly payments are lower (or better, nonexistent). Bonus at work? Tax refund? Use these windfalls to make extra lump-sum payments on your debt. By lowering the amount you owe on a monthly basis, your DTI will drop, too.