Debt-to-Income (DTI) Ratio

Debt-to-income (DTI) ratio summary:

• Your debt-to-income ratio (DTI) measures the proportion of your monthly income that goes to debt and housing payments.

• Lenders use DTI to determine whether you can afford to add a new payment to your budget.

• You can improve your DTI by increasing your income or reducing your debts.

Debt-to-income ratio definition and meaning

The debt-to-income ratio is a measure of how much of your money is already earmarked to pay for debts and housing. A lower DTI could mean that you have wiggle room in your budget.

Key concept:

DTI is calculated by figuring out how much of your money must be used on minimum debt payments and housing expenses. It’s possible to have a low DTI at any income level.

More about DTI 

DTI stands for debt-to-income ratio. It’s a key factor in determining whether a lender will loan you money. The lower your DTI, the more confidence lenders have that there’s room in your monthly budget for a new payment. 

If you're concerned about your DTI, two factors work in your favor. You can lower your DTI by:

1. Paying down debt

2. Earning more money

In other words, there are ways you can improve your DTI. 

When a lender looks at your DTI, they’ll include the payment on the new loan that you want. Traditional wisdom says that a DTI at or below 36%, including the new loan, puts you in the best position to be approved. 

It’s okay if your DTI is higher, though. For some loans, you could be approved with a 50% or higher DTI. 

DTI: a comprehensive breakdown 

Determining your own DTI is easy. The first thing to do is make a list of all your monthly payments. This should include:

• Housing. If you rent, it’s just your rent. If you own the home or you’re applying for a mortgage, the housing expense includes the principal and interest payment on your mortgage, homeowners insurance, any HOA fees you have to pay, and property taxes.

• Home equity loan or home equity line of credit (HELOC) payment

• Student loan payment

• Credit card minimum payments

• Auto loan payment

• Personal loan or line of credit payment

• Child support or spousal support payment

There's no need to include these:

• Expenses like groceries, gas, and entertainment

• Utility payments

• Health or auto insurance

Add up your debt and housing expenses and divide the total by your monthly income (before taxes). Or skip the math and use a DTI calculator.