Debt-to-Income (DTI) Ratio Calculator
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Your DTI Ratio
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Understanding Your Debt-to-Income (DTI) Ratio
Your Debt-to-Income (DTI) ratio is one of the most critical metrics lenders use to assess your financial health and creditworthiness. Whether you are applying for a mortgage, a car loan, or a personal line of credit, your DTI helps lenders determine if you can afford to repay the new debt.
What is Debt-to-Income Ratio?
The Debt-to-Income ratio is a percentage that represents the portion of your gross monthly income that goes toward paying your monthly debts. It compares how much you owe (debts) against how much you earn (income).
The Formula:
DTI = (Total Monthly Debt Payments / Gross Monthly Income) × 100
DTI = (Total Monthly Debt Payments / Gross Monthly Income) × 100
What Counts as "Monthly Debt"?
When calculating your DTI, lenders look at recurring monthly liabilities. These typically include:
- Housing Costs: Rent or mortgage payments (including principal, interest, taxes, and insurance).
- Vehicle Loans: Monthly lease or loan payments.
- Student Loans: Required minimum monthly payments.
- Credit Cards: The minimum monthly payment due (not the total balance).
- Other Debts: Personal loans, child support, or alimony payments.
Note: Living expenses like groceries, utilities, gym memberships, and entertainment subscriptions are generally NOT included in DTI calculations.
Interpreting Your DTI Score
Different lenders have different thresholds, but general guidelines categorize DTI ratios as follows:
- 35% or Less (Good): This is considered a healthy ratio. It indicates that your debt is manageable relative to your income. You likely have money left over for savings and unexpected expenses. Lenders view you as a low-risk borrower.
- 36% to 43% (Manageable): You are within the acceptable range for most lenders, including those offering Qualified Mortgages. However, you may have less flexibility in your budget. Lenders might look closer at other factors like your credit score or down payment.
- 44% to 49% (Concern): You are approaching a high-risk level. While you might still find lenders willing to approve a loan, the terms might be less favorable (higher interest rates) or you may be required to have significant cash reserves.
- 50% or Higher (High Risk): At this level, more than half of your gross income goes to debt. Most mortgage lenders will deny applications with a DTI above 43-50%. It suggests you have very little financial room for error.
Front-End vs. Back-End Ratio
In mortgage lending, you may hear about two specific types of DTI:
- Front-End Ratio: This only calculates your projected housing expenses (new mortgage, property tax, insurance, HOA) divided by your gross income. Lenders typically prefer this to be under 28%.
- Back-End Ratio: This is the calculator above. It includes housing expenses PLUS all other monthly debts. This is the more significant number for loan approval, with 43% being a common hard limit for conventional loans.
How to Lower Your DTI
If your DTI is higher than you'd like, consider these strategies before applying for a major loan:
- Pay Off Small Balances: Eliminating a small credit card balance or the last few months of a car loan removes that monthly payment entirely from the calculation.
- Increase Your Income: Taking on a side hustle, freelance work, or asking for a raise increases the denominator in the formula, lowering the ratio.
- Avoid New Debt: Do not open new credit lines or finance large purchases in the months leading up to a mortgage application.
- Refinance: Refinancing high-interest loans to a lower rate or a longer term can reduce the monthly payment obligation, thereby improving your DTI.