How to Calculate Monthly Salary with Hourly Rate

Calculate your DTI to determine your eligibility for mortgages and loans.

Step 1: Monthly Income

Note: Lenders usually look at your gross income calculated on a monthly basis.

Step 2: Monthly Debt Payments

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. Unlike your credit score, which measures your history of paying debts, your DTI measures your capacity to repay new debt based on your current income.

Simply put, it is the percentage of your gross monthly income that goes toward paying your monthly debt obligations.

Why DTI Matters for Mortgages

When applying for a home loan, lenders want to ensure you aren't "house poor." The Consumer Financial Protection Bureau (CFPB) generally recommends a DTI of 43% or lower for obtaining a Qualified Mortgage.

• Front-End Ratio: The percentage of income that goes strictly toward housing costs (mortgage, taxes, insurance). Ideally, this should be under 28%.
• Back-End Ratio: The percentage of income that goes toward all debts combined (housing + cars + cards + loans). This is the number calculated above.

How to Lower Your DTI

If your calculation shows a percentage higher than 43%, consider these strategies before applying for a major loan:

1. Pay off small balances: Eliminate credit card balances completely to remove the minimum payment from the equation.
2. Increase Income: Documenting freelance work, bonuses, or overtime can increase the denominator in the calculation, lowering the ratio.
3. Avoid New Debt: Do not open new credit lines or buy a car while preparing to apply for a mortgage.
4. Refinance Loans: extending the term of a student loan or auto loan can lower the monthly payment obligation, improving your DTI immediately.

Frequently Asked Questions

What is a good Debt-to-Income ratio?

Generally, a DTI of 36% or less is considered excellent. Ratios between 36% and 43% are acceptable for most conventional loans. Ratios above 43% may limit your borrowing options to FHA loans or require a co-signer.

Does DTI include utilities and groceries?

No. DTI only includes debt obligations that appear on your credit report (loans, credit cards) plus housing costs (rent/mortgage). It does not include variable living expenses like utilities, food, gas, or entertainment.

Should I use gross or net income?

Lenders almost always calculate DTI using your Gross Monthly Income (income before taxes and deductions are taken out), not your take-home pay.