Debt-to-Income Ratio
Debt-to-income 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:
Paying down debt
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.
Debt-to-Income Ratio FAQs
What is debt-to-income ratio, and why is it important?
Your debt-to-income (DTI) ratio is all your monthly debt payments divided by your gross (before-tax) income. Your ratio is one way to determine how affordable your debt is at your income level. Lenders can use your DTI ratio to measure your ability to manage your monthly payments and repay the money you’ve borrowed.
Does DTI affect my credit score?
No, DTI doesn’t affect your credit score because credit scoring models don’t consider your income. However, lower DTI often goes hand in hand with good credit scores because it’s easier to have good payment history and low utilization when you carry less debt.
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