1. Monthly Gross Income
2. Monthly Debt Payments
What is a Debt-to-Income (DTI) Ratio?
Your Debt-to-Income (DTI) ratio is a personal finance measure that compares your monthly debt payments to your monthly gross income. Lenders use this ratio to assess your ability to manage monthly payments and repay the money you plan to borrow.
Unlike your credit score, which tracks your history of paying bills, the DTI ratio focuses purely on your budget's capacity. A lower DTI ratio shows a good balance between debt and income, while a higher DTI ratio can signal that you may have too much debt for the amount of income you earn.
How to Calculate DTI
To calculate your DTI ratio manually, use the following formula:
DTI = (Total Monthly Debt Payments / Gross Monthly Income) x 100
Example: If you pay $1,500 for mortgage, $300 for a car loan, and $200 for credit cards (Total Debt = $2,000), and your gross monthly income is $6,000:
- $2,000 / $6,000 = 0.3333
- 0.3333 x 100 = 33.33%
Understanding DTI Thresholds
- 35% or less: Generally viewed as favorable. You likely have manageable debt relative to your income.
- 36% to 49%: Lenders may ask for additional eligibility criteria. You are nearing the limit of what most institutions consider "safe."
- 50% or more: Considered high risk. With more than half your income going to debt, you may struggle to get approved for new loans or mortgages.
Front-End vs. Back-End DTI
Front-End Ratio: This only includes housing-related expenses (mortgage principal, interest, taxes, insurance, and HOA fees) divided by gross income. Lenders typically prefer this to be under 28%.
Back-End Ratio: This includes all monthly debt obligations (housing + cards + loans). This is the number generated by our calculator above and is the most common metric for overall loan approval.
Frequently Asked Questions
Does rent count toward DTI?
If you are applying for a mortgage, your current rent is usually not counted because the mortgage will replace it. However, for personal loans or auto loans, lenders may consider rent as a liability.
Is gross or net income used for DTI?
DTI calculations always use gross income (income before taxes and deductions), not net income (take-home pay).