Understanding Your Debt-to-Income (DTI) Ratio
Your Debt-to-Income (DTI) ratio is one of the most critical financial metrics used by lenders to assess your borrowing risk. Unlike your credit score, which measures your history of paying bills, your DTI measures your capacity to repay new debt.
Simply put, it is the percentage of your gross monthly income that goes toward paying your monthly debt obligations. Lenders use this figure to determine if you can afford to take on a mortgage, auto loan, or personal loan.
How Is DTI Calculated?
The formula for calculating your DTI is relatively straightforward but requires accuracy regarding your financial obligations. The formula is:
(Total Monthly Debt Payments / Gross Monthly Income) x 100 = DTI %
- Front-End DTI: This ratio only considers your housing expenses (rent or mortgage, property taxes, homeowners insurance, and HOA fees) divided by your gross income.
- Back-End DTI: This is the comprehensive number calculated by the tool above. It includes housing expenses plus all other recurring debt payments like credit cards, student loans, and auto loans.
Interpreting Your DTI Score
Once you have calculated your percentage using the tool above, here is how to interpret the results:
35% or Lower: Excellent
This is the ideal range. A DTI below 36% indicates that you have manageable debt levels relative to your income. You likely have money left over for savings and investments. Lenders view you as a low-risk borrower, which can help you secure the best interest rates.
36% to 42%: Manageable
You are in a decent position, but lenders might start looking closer at your application. While you can typically get approved for loans in this range, you might not qualify for the absolute lowest tier of interest rates. It is a sign that you should avoid taking on new debt if possible.
43% to 49%: Concerning
This is often the tipping point. Specifically, 43% is the highest DTI ratio a borrower can usually have and still get a Qualified Mortgage. If your DTI is in this range, you may struggle to get approved for a mortgage or may be required to have significant cash reserves.
50% or Higher: Critical
With half of your pre-tax income going to debt, you have very little flexibility for emergencies or living expenses. Lenders will view this as high risk. At this stage, your priority should be aggressive debt repayment or increasing your income before applying for new credit.
How to Lower Your DTI Ratio
If your calculation shows a high percentage, don't panic. DTI is not permanent. Here are actionable steps to lower it:
- Increase Your Monthly Payment: Pay more than the minimum on your debts, starting with the highest interest rates or lowest balances (snowball method).
- Refinance High-Interest Loans: If you can lower your monthly payment through refinancing (without extending the term too long), you can immediately lower your DTI.
- Increase Your Income: Since DTI is a ratio, increasing the denominator (income) is just as effective as decreasing the numerator (debt). Consider side hustles or asking for a raise.
- Avoid New Debt: Do not open new credit cards or finance large purchases while trying to lower your ratio.
Frequently Asked Questions
Does DTI impact my credit score?
No, your DTI ratio is not part of your credit score calculation. However, the high credit card balances that cause a high DTI often result in high credit utilization, which does hurt your score.
Do I include utilities in my DTI?
Generally, no. Variable living expenses like utilities, groceries, and gas are not included in the debt calculation. Lenders look at fixed, recurring debt obligations.
What income should I use?
Always use your gross monthly income—that is your income before taxes and deductions are taken out.
Disclaimer: This calculator is for educational purposes only and does not constitute financial advice. Lending criteria vary by institution.