Debt-to-Income (DTI) Ratio Calculator
Your Debt-to-Income Ratio is:
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Understanding Your Debt-to-Income (DTI) Ratio
The Debt-to-Income (DTI) ratio is a personal finance measure that compares your total monthly debt payments to your gross monthly income. This figure is used by lenders, particularly in mortgage lending, to determine your ability to manage monthly payments and repay borrowed money.
How the Calculation Works
The formula for DTI is straightforward: (Total Monthly Debt Payments / Gross Monthly Income) x 100. Gross monthly income refers to your total pay before taxes and other deductions are taken out.
For example, if you pay $1,200 for your mortgage, $300 for a car loan, and $200 for other debts, your total monthly debt is $1,700. If your gross monthly income is $5,000, your DTI is:
($1,700 / $5,000) = 0.34, or 34%
What is a "Good" DTI Ratio?
- 36% or Less: This is generally considered a healthy debt load. Most lenders view this as a sign that you have a good balance between debt and income.
- 37% to 43%: This range is manageable but may cause some lenders concern. You might find it harder to qualify for certain types of premium credit.
- 44% to 49%: Financial strain is likely. You may struggle to handle unexpected expenses, and mortgage options become significantly limited.
- 50% or More: This is considered a high-risk level. More than half of your income is going toward debt, leaving very little room for savings or living expenses.
Types of DTI
Lenders often look at two specific types of DTI:
- Front-End Ratio: This looks specifically at housing costs (mortgage/rent, insurance, taxes) compared to income. Ideally, this should be under 28%.
- Back-End Ratio: This is the "Total DTI" calculated above, which includes all recurring monthly debt payments.
How to Lower Your DTI
There are only two ways to lower this ratio: decrease your monthly recurring debt or increase your gross monthly income. Tactics include paying off credit card balances to eliminate minimum payments, avoiding new financing until old debts are cleared, or seeking a raise or additional income stream.