Know Your Debt-to-Income Ratio (2024)

Your debt-to-income ratio (DTI)is a personal finance measure that compares the amount of debt you have to your gross income. You can calculate your debt-to-income ratio by dividing your total recurring monthly debt by your gross monthly income

Why do you need to know this number? Because lenders use it as a measure of your ability to repay the money you have borrowed or to take on additional debt—such as a mortgage or a car loan. It's also a helpful number for you to know as you consider whether you want to make a big purchase in the first place. This article will walk you through the steps to take to determine your debt-to-income ratio.

Key Takeaways

  • To calculate your debt-to-income ratio (DTI), add up all of your monthly debt obligations, then divide the result by your gross (pre-tax) monthly income, and then multiply that number by 100 to get a percentage.
  • Calculating your debt-to-income ratio before making a big purchase, such as a new home or car, helps you see whether or not you can afford it.
  • Paying off debt, avoiding taking on new debt, and increasing your income are the only ways to lower your DTI.

How to Calculate Your DTI

To calculate your debt-to-income ratio, start by adding up all of your recurring monthly debts. Beyond your mortgage, other recurring debts to include are:

  • Auto loans
  • Student loans
  • Minimum credit card payments
  • Child support and alimony
  • Any other monthly debt obligations

Next, determine your gross (pre-tax) monthly income, including:

  • Wages
  • Salaries
  • Tips and bonuses
  • Pension
  • Social Security
  • Child support and alimony
  • Any other additional income

Now divide your total recurring monthly debt by your gross monthly income. The quotient will be a decimal; multiply by 100 to express your debt-to-income ratio as a percentage.

Can You Afford That Big Purchase?

If you are considering a major acquisition, you should take into account the new purchase as you work out your debt-to-income ratio. You can be sure that any lender considering your application will do so.

You can use an online calculator, for example, to estimate the amount of the monthly mortgage payment or new car loan that you are considering.

Comparing your "before" and "after" debt-to-income ratio is a good way to help you determine whether you can handle that home purchase or new car right now.

When you pay off debt—a student loan or a credit card—recalculating your debt-to-income ratio shows how much you have improved your financial status.

For example, in most cases, lenders prefer to see a debt-to-income ratio smaller than 36%, with no more than 28% of that debt going towards servicing your mortgage. To get a qualified mortgage, your maximum debt-to-income ratio should be no higher than 43%. Let's see how that could translate into a real-life situation.

36%

Most lenders prefer to see a debt-to-income ratio of no higher than 36%.

Example of a DTI Calculation

Here's a look at an example of a debt-to-income ratio calculation.

Mary has the following recurring monthly debts:

  • $1,000 mortgage
  • $500 auto loan
  • $200 student loan
  • $200 minimum credit card payments
  • $400 other monthly debt obligations

Mary's total recurring monthly debt equals $2,300.

She has the following gross monthly income:

  • $4,000 salary from her primary job
  • $2,000 from her secondary job

Mary's gross monthly income equals $6,000.

Mary's debt-to-income ratio is calculated by dividing her total recurring monthly debt ($2,300) by her gross monthly income ($6,000). The math looks like this:

Debt-to-income ratio = $2,300 /$6,000 = 0.38

Now multiply by 100 to express it as a percentage:

0.38 X 100 = 38%

Mary's debt-to-income ratio = 38%

Less debt or a higher income would give Mary a lower, and therefore better, debt-to-income ratio. Say she manages to pay off her student and auto loans, but her income stays the same. In that case the calculation would be:

Total recurring monthly debt = $1,600

Gross monthly income = $6,000

Mary's new debt-to-income ratio = $1,600 /$6,000 = 0.27 X 100 = 27%.

Know Your Debt-to-Income Ratio (2024)

FAQs

Know Your Debt-to-Income Ratio? ›

How do I calculate my debt-to-income ratio? To calculate your DTI, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.

How do I find out my debt-to-income ratio? ›

How to calculate your debt-to-income ratio
  1. Add up your monthly bills which may include: Monthly rent or house payment. ...
  2. Divide the total by your gross monthly income, which is your income before taxes.
  3. The result is your DTI, which will be in the form of a percentage. The lower the DTI, the less risky you are to lenders.

What is a safe income to debt ratio? ›

What is an ideal debt-to-income ratio? Lenders typically say the ideal front-end ratio should be no more than 28 percent, and the back-end ratio, including all expenses, should be 36 percent or lower.

Is 7% a good debt-to-income ratio? ›

DTI is one factor that can help lenders decide whether you can repay the money you have borrowed or take on more debt. A good debt-to-income ratio is below 43%, and many lenders prefer 36% or below. Learn more about how debt-to-income ratio is calculated and how you can improve yours.

Is 12% a good debt-to-income ratio? ›

Ideally, lenders prefer a debt-to-income ratio lower than 36%, with no more than 28%–35% of that debt going toward servicing a mortgage. 1 The maximum DTI ratio varies from lender to lender.

How can I lower my debt-to-income ratio quickly? ›

Pay Down Debt

Paying down debt is the most straightforward way to reduce your DTI. The fewer debts you owe, the lower your debt-to-income ratio will be. Suppose that you have a car loan with a monthly payment of $500. You can begin paying an extra $250 toward the principal each month to pay off the vehicle sooner.

What is a bad debt-to-income ratio? ›

Key takeaways

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

What is the average debt-to-income ratio in the US? ›

Average American debt payment: 9.8% of income

The Federal Reserve tracks the nation's household debt payments as a percentage of disposable income. The most recent debt payment-to-income ratio, from the fourth quarter of 2023, is 9.8%.

Is a 3% debt-to-income ratio good? ›

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

Is a 20% debt-to-income ratio bad? ›

It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

Is rent considered debt? ›

Rent is an expense of living which is normally paid monthly on the first day of the month. If you haven't paid your rent by the second day of the month, it would be considered a debt. What is the most rent that can increase?

How much credit card debt is acceptable? ›

The general rule of thumb is that you shouldn't spend more than 10 percent of your take-home income on credit card debt.

How much debt is too much to buy a house? ›

Generally speaking, most mortgage lenders use a 43% DTI ratio as a maximum for borrowers. If you have a DTI ratio higher than 43%, you probably are carrying too much debt because you are less likely to qualify for a mortgage loan.

How do I calculate my debt-to-income ratio? ›

How do I calculate my debt-to-income ratio? To calculate your DTI, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.

Does a mortgage count in the debt-to-income ratio? ›

These are some examples of payments included in debt-to-income: Monthly mortgage payments (or rent) Monthly expense for real estate taxes. Monthly expense for home owner's insurance.

Are hoa fees included in the debt-to-income ratio? ›

If you have a single family home outside of an HOA community, you'll have to take care of all the maintenance costs yourself. The good thing is, underwriters won't consider such costs when they underwrite your loan. But within an HOA, those dues will be counted in your debt-to-income ratio when you finance a home.

How do I find my debt-to-income ratio on credit Karma? ›

How to calculate your debt-to-income ratio. To calculate your DTI, add up the total of all of your monthly debt payments and divide this amount by your gross monthly income, which is typically the amount of money you make before taxes and other deductions each month.

How to find debt-to-income ratio on Experian? ›

Divide your total monthly debt payments by your gross income. Gross income is your pay before taxes and other deductions are taken out. Multiply the resulting number by 100 to express your DTI as a percentage.

What is the average household income to debt ratio? ›

Average American debt payment: 9.8% of income

The Federal Reserve tracks the nation's household debt payments as a percentage of disposable income. The most recent debt payment-to-income ratio, from the fourth quarter of 2023, is 9.8%.

What is the debt-to-income ratio for a personal loan? ›

Ideally, you want your DTI to be as low as possible because that indicates that your income is well above what you need for recurring expenses. If you're applying for a personal loan, lenders typically want to see a DTI of 35% to 40% or less.

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