Debt-to-Income Ratio Calculator
What is Debt-to-Income (DTI) Ratio?
Your Debt-to-Income (DTI) ratio is one of the most critical metrics lenders use to assess your creditworthiness. It represents the percentage of your gross monthly income that goes toward paying your monthly debts. Unlike your credit score, which tracks your payment history, your DTI measures your capacity to repay new debt.
Lenders look at DTI to determine if you can afford to take on another payment, such as a mortgage or car loan. A lower DTI ratio indicates a good balance between debt and income, while a high DTI ratio signals that you may have too much debt for the amount of income you earn.
How is DTI Calculated?
The formula for calculating your DTI is relatively straightforward but requires accurate financial data. The calculator above uses the standard front-end method used by most mortgage lenders:
(Total Monthly Debt Payments ÷ Gross Monthly Income) × 100 = DTI %
Your Gross Monthly Income is the money you earn before taxes and deductions. Your Total Monthly Debt Payments include recurring obligations such as:
- Rent or mortgage payments (including taxes and insurance).
- Auto loan payments.
- Minimum credit card payments.
- Student loan payments.
- Alimony or child support payments.
Note: Generally, monthly expenses like groceries, utilities, and entertainment are NOT included in the DTI calculation.
Interpreting Your Results
Understanding where you fall on the DTI spectrum is essential for financial planning. Here is a general breakdown of DTI ranges:
- 35% or less (Good): This is the ideal range. You have manageable debt relative to your income, and lenders view you as a low-risk borrower. You likely have disposable income for savings and investments.
- 36% to 43% (Moderate): You are still eligible for most loans, but you may be nearing your limit. Lenders might ask for additional documentation or offer slightly higher interest rates. The 43% mark is often the highest ratio a borrower can have and still get a Qualified Mortgage.
- 44% or higher (Risky): At this level, lenders worry about your ability to meet monthly obligations if an emergency arises. You may face difficulties getting approved for new credit, or you may be restricted to FHA loans or subprime products.
Real-World Example
Let's look at a realistic scenario to understand how the numbers work:
Imagine Sarah. She earns a gross salary of $60,000 per year, which breaks down to $5,000 per month.
Her monthly debts are:
- Rent: $1,200
- Car Payment: $400
- Student Loans: $300
- Credit Cards: $100
Total Monthly Debt: $2,000
Calculation: ($2,000 ÷ $5,000) × 100 = 40%
Sarah's DTI is 40%. She falls into the "Moderate" category. She can likely qualify for a mortgage, but paying down her credit card debt or refinancing her car loan could help drop her below 36% for better terms.
How to Lower Your DTI Ratio
If your calculation shows a high percentage, there are two primary ways to improve it: increase your income or decrease your debt.
- Pay off high-interest debt: Focus on eliminating credit card balances or smaller loans (the snowball method) to remove those monthly payments entirely.
- Refinance loans: Extending the term of a loan or getting a lower interest rate can reduce your required monthly payment, instantly lowering your DTI.
- Avoid new debt: Do not open new credit lines before applying for a major loan like a mortgage.
- Increase Income: While harder to achieve immediately, a raise, side hustle, or bonus adds to the denominator of the equation, lowering the overall ratio.