Debt-to-Income (DTI) Ratio Calculator
Your Debt-to-Income Ratio is
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What is a Debt-to-Income (DTI) Ratio?
Your Debt-to-Income (DTI) ratio is one of the most critical metrics lenders use to assess your ability to manage monthly payments and repay debts. It represents the percentage of your gross monthly income that goes toward paying your monthly debt obligations.
Unlike your credit score, which tracks your payment history, your DTI ratio strictly measures your borrowing capacity. A lower DTI indicates that you have a good balance between debt and income, making you a more attractive borrower for mortgages, auto loans, and personal loans.
How to Calculate Your DTI
The DTI formula is straightforward but requires accuracy regarding your financial obligations. The calculation involves two main figures:
- Total Monthly Debt: This includes recurring debt payments such as rent or mortgage, car loans, student loans, credit card minimum payments, and alimony or child support. It usually does not include variable expenses like groceries, utilities, or entertainment.
- Gross Monthly Income: This is your total income earned before taxes and other deductions are taken out.
The formula is: (Total Monthly Debt / Gross Monthly Income) × 100 = DTI %
Understanding Your DTI Score
Once you have used the calculator above, interpreting the result is key to understanding your financial health:
- 35% or less (Good): This is considered a healthy DTI. You likely have money left over after paying bills, and lenders view you as a low-risk borrower.
- 36% to 43% (Manageable): You are in a decent position, but lenders might ask for more documentation before approving a large loan like a mortgage. 43% is typically the highest ratio a borrower can have and still get a Qualified Mortgage.
- 44% or higher (High Risk): A ratio this high suggests you may have too much debt for your income level. Lenders may view you as high-risk, and you might struggle to handle emergency expenses.
Front-End vs. Back-End Ratio
In real estate, lenders often look at two types of DTI ratios:
- Front-End Ratio: This only calculates the percentage of income that goes toward housing costs (mortgage principal, interest, taxes, and insurance). Lenders prefer this to be below 28%.
- Back-End Ratio: This includes housing costs plus all other monthly debt payments. This is the number calculated by the tool above, and lenders prefer it to be below 36-43%.
Tips to Lower Your DTI Ratio
If your ratio is higher than you'd like, consider these strategies to improve your borrowing power:
- Increase your income: Taking on a side gig, freelancing, or asking for a raise increases the denominator in the equation, lowering the percentage.
- Pay off small debts: Using the "snowball method" to eliminate small credit card balances or loans removes those monthly payments from the calculation entirely.
- Avoid new debt: Refrain from financing furniture, cars, or opening new credit cards before applying for a major loan like a mortgage.