Debt-to-Income Ratio Calculator
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Your Debt-to-Income Ratio is 0.00%
What is Debt-to-Income (DTI) Ratio?
Your Debt-to-Income (DTI) ratio is a crucial financial metric used by lenders to assess your borrowing risk. It represents the percentage of your gross monthly income that goes towards paying your monthly debt obligations. Lenders use this figure to determine if you can comfortably afford to take on new debt, such as a mortgage or a car loan.
How to Calculate Your DTI
The formula for calculating your DTI is relatively straightforward. You divide your total recurring monthly debt by your gross monthly income (income before taxes and deductions). The result is then multiplied by 100 to get a percentage.
Example Calculation:
- Annual Income: $72,000 (which is $6,000/month)
- Monthly Rent: $1,500
- Car Payment: $400
- Credit Cards: $200
- Total Debt: $2,100
In this scenario, the calculation would be: ($2,100 ÷ $6,000) × 100 = 35% DTI.
Understanding Good vs. Bad DTI Ratios
While lender requirements vary, general guidelines are as follows:
- 35% or lower: Considered excellent. You have a good balance between debt and income, making you a strong candidate for new loans.
- 36% to 43%: Considered acceptable but getting tight. Many mortgage lenders set 43% as the maximum DTI for a Qualified Mortgage.
- 44% to 49%: High risk. You may struggle to find favorable loan terms, and lenders may require additional verification or larger down payments.
- 50% or higher: Critical. You are spending half your income on debt repayment, leaving little for living expenses or savings. Debt consolidation or reduction should be a priority.
How to Lower Your DTI
If your ratio is higher than desired, you can improve it by either increasing your income or reducing your monthly debt obligations. Paying off credit cards with high monthly minimums often has the most immediate impact on your ratio, as it eliminates that monthly obligation entirely from the equation.