Include rent/mortgage, loan payments (car, student), credit card minimums, alimony, child support, etc.
Understanding Your Debt-to-Income Ratio (DTI)
The Debt-to-Income ratio (DTI), also known as the Debt-Service-to-Income ratio (DSRI), is a personal finance measure that lenders use to gauge your ability to manage monthly payments and repay debts. It compares your total monthly debt payments to your gross monthly income. A lower DTI generally indicates a better financial health and a lower risk for lenders.
How is DTI Calculated?
The formula for calculating DTI is straightforward:
For DTI calculation, you should sum up all your recurring monthly debt obligations. This typically includes:
Rent or Mortgage Payment (including property taxes and homeowner's insurance if applicable)
Minimum Credit Card Payments
Car Loan Payments
Student Loan Payments
Personal Loan Payments
Alimony or Child Support Payments
Any other recurring debt obligations
Note: Utilities, groceries, and other living expenses are generally NOT included in this calculation, as DTI focuses specifically on debt repayment capacity.
What is Gross Monthly Income?
Gross monthly income is your income before any taxes or deductions are taken out. This includes your salary, wages, commissions, tips, bonuses, and any other regular income sources. If your income varies significantly month-to-month, it's often best to use an average over several months.
Interpreting Your DTI Ratio
Lenders use DTI ratios to help decide whether to approve a loan and how much interest to charge. While specific thresholds can vary by lender and loan type, here's a general guideline:
35% or less: Excellent. You likely have a strong ability to handle debt.
36% to 43%: Good. This is often considered the acceptable range for many mortgage lenders, but higher might make other loans harder to get.
44% to 49%: Fair. You may have difficulty qualifying for new credit or loans.
50% or higher: Poor. This is generally considered too high, indicating you may be overextended financially. Lenders are unlikely to approve new credit.
It's important to remember that these are general guidelines. Lenders will also consider your credit score, employment history, savings, and other factors.
Why is DTI Important?
A good DTI ratio is a key indicator of your financial health. It helps you understand how much of your income is already committed to debt, allowing you to make informed decisions about taking on new financial obligations. Managing your DTI can improve your chances of loan approval, potentially secure better interest rates, and provide greater financial flexibility.
Example Calculation:
Let's say Sarah has a gross monthly income of $5,500. Her monthly debt payments include:
Mortgage Payment: $1,800
Car Loan Payment: $400
Student Loan Payment: $300
Minimum Credit Card Payments: $150
Her total monthly debt payments are $1,800 + $400 + $300 + $150 = $2,650.
Her DTI ratio is calculated as:
DTI = ($2,650 / $5,500) * 100 = 48.18%
Based on general guidelines, Sarah's DTI of 48.18% is considered high (in the "Fair" to "Poor" range), which might make it challenging for her to qualify for significant new loans without addressing her debt or increasing her income.
function calculateDTI() {
var monthlyGrossIncomeInput = document.getElementById("monthlyGrossIncome");
var totalMonthlyDebtInput = document.getElementById("totalMonthlyDebt");
var resultDiv = document.getElementById("result");
var monthlyGrossIncome = parseFloat(monthlyGrossIncomeInput.value);
var totalMonthlyDebt = parseFloat(totalMonthlyDebtInput.value);
// Clear previous error messages
resultDiv.innerHTML = "";
// Validate inputs
if (isNaN(monthlyGrossIncome) || monthlyGrossIncome <= 0) {
resultDiv.innerHTML = "Please enter a valid Gross Monthly Income.";
resultDiv.style.backgroundColor = "#dc3545"; // Error red
return;
}
if (isNaN(totalMonthlyDebt) || totalMonthlyDebt < 0) {
resultDiv.innerHTML = "Please enter a valid Total Monthly Debt.";
resultDiv.style.backgroundColor = "#dc3545"; // Error red
return;
}
// Calculate DTI
var dti = (totalMonthlyDebt / monthlyGrossIncome) * 100;
var formattedDti = dti.toFixed(2);
var interpretation = "";
var resultBackgroundColor = "var(–success-green)";
if (dti <= 35) {
interpretation = "Excellent DTI!";
resultBackgroundColor = "var(–success-green)";
} else if (dti <= 43) {
interpretation = "Good DTI";
resultBackgroundColor = "var(–success-green)";
} else if (dti <= 49) {
interpretation = "Fair DTI – Potentially High";
resultBackgroundColor = "#ffc107"; // Warning yellow
} else {
interpretation = "High DTI – Caution Advised";
resultBackgroundColor = "#dc3545"; // Error red
}
resultDiv.innerHTML = "Your DTI Ratio: " + formattedDti + "%" + interpretation + "";
resultDiv.style.backgroundColor = resultBackgroundColor;
}