Debt-to-Income (DTI) Ratio Calculator
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What is a Debt-to-Income (DTI) Ratio?
The Debt-to-Income (DTI) ratio is a personal finance measure that compares an individual's monthly debt payment to their monthly gross income. Lenders, particularly mortgage providers, use this percentage to evaluate your ability to manage monthly payments and repay borrowed money.
How to Calculate DTI Ratio
Calculating your DTI ratio is straightforward. Use the following formula:
DTI = (Total Monthly Debt Payments / Gross Monthly Income) x 100
Example: If your monthly rent is $1,200, car loan is $300, and student loan is $200, your total monthly debt is $1,700. If your gross monthly income (before taxes) is $5,000, your DTI is 34% ($1,700 / $5,000).
DTI Ratio Guidelines
- 36% or Less: This is considered an ideal DTI. You have a manageable level of debt and are viewed as a low-risk borrower.
- 37% to 43%: This range is acceptable, though some lenders may require additional documentation. Most conventional mortgages set 43% as the maximum.
- 44% to 50%: You are heavily leveraged. You may find it difficult to qualify for new loans unless you have significant cash reserves or high credit scores.
- Above 50%: More than half of your income goes to debt. Financial flexibility is severely limited, and qualifying for most loans is unlikely.
How to Lower Your DTI
If your ratio is higher than you'd like, there are two primary ways to lower it:
- Reduce Monthly Debt: Pay off credit cards or refinance loans to lower monthly payments.
- Increase Gross Income: Pursue a raise, overtime, or secondary income streams. Because DTI uses gross income, every extra dollar earned before taxes directly improves the ratio.