What is DTI?

By Gina Freeman

Reviewed by James Heflin

Sep 19, 2023

Read time: 5 min

Couple working on finances together at home

Key takeaways:

  • DTI, or debt-to-income ratio, measures your debt payments against your pretax income.

  • A low DTI means your current debt level is affordable. 

  • You can bring a high DTI down by refinancing to lower payments, paying off debt, or increasing your income.

You don’t need a finance degree to have money smarts. Understanding a few simple terms can help you lead your best financial life. One of those terms is DTI, or debt-to-income ratio. It’s an important concept because lenders use DTI to determine whether you can afford the loan you want. Understanding your DTI can give you an important edge when you’re looking for a loan. 

Definition of DTI (debt-to-income ratio)

DTI, or debt-to-income ratio, is the percentage of income you spend on your debts each month. 

How to calculate DTI

To calculate DTI, divide your total debt payments by your total income. If your income is $5,000 per month, and your debt payments total $2,500 per month, divide $2,500 by $5,000. 

2,500 ÷ 5,000 = 0.5 (50%)

There are a few rules:

  • The income you’ll use is your total before-tax income, not your take-home pay. To be counted, income must be ongoing and reliable.

  • Don’t include every bill. General living expenses like food, income taxes, utilities, fuel, and childcare don’t count toward your DTI. 

  • Do include housing costs—either your rent or your total mortgage payment—principal, interest, taxes, insurance, and HOA dues if you pay them. 

  • Do include the minimum payments on your credit cards, as well as the monthly payments on your loans. Include car loans, personal loans, student loans, and other debts you’re paying off. If you are legally obligated to pay child support or spousal support, include those payments in your DTI (but the lender might not consider these payments if they’re due to end soon).

Debt-to-income ratio (DTI) calculator

Monthly gross income (estimated)

Monthly debt expenses (estimated)

DTI examples

Here are a few examples of DTI calculations. 

DTI with a personal loan

Dan and Lucy earn $8,000 per month between them. Their rent is $2,000. The minimum payments on their credit cards total $300 per month, and they have a $300 monthly car payment. They are applying together for a $10,000 personal loan with a $200 per month payment. 

Here’s how the lender calculates their DTI:

Expenses

Income

$2,000 (housing)

$4,000 (Dan’s pre-tax monthly income)

$300 (credit card minimum payments)

$4,000 (Lucy’s pre-tax monthly income)

$300 (car loan payment)

 

$200 (new loan payment)

 

$2,800 (total expenses)

$8,000 (total income)

Dan and Lucy’s combined DTI

$2,800 ÷ $8,000 = .35 (35%)

Most lenders will approve a loan at a 35% DTI, assuming the applicants meet their other requirements. 

DTI with a home equity loan

Luke earns $72,000 a year ($6,000 per month) and owns his home. His mortgage payment includes $1,100 for principal and interest, plus $140 for property taxes and $60 for homeowner’s insurance (total payment: $1,300). He also has a $300 car payment. Luke wants a $15,000 home equity loan for some renovations. Its payment would be $150. 

Here’s Luke’s DTI:

Expenses

Income

$1,300 (housing)

$6,000 (Luke’s pre-tax monthly income)

$300 (car loan payment)

 

$150 (new loan payment)

 

$1,750 (total expenses)

$6,000 (total income)

Luke’s DTI

$1,750 ÷ $6,000 = .29 (29%)

Most lenders will consider Luke’s DTI low. That’ll help him get the loan he wants.

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DTI for a debt consolidation loan

Chantal earns $5,000 per month, pays $1,500 in rent, and owes $20,000 in credit card debt. Her total monthly credit card payments are $800. Before borrowing,

Chantal’s DTI is:

Expenses

Income

$1,500 (housing)

$5,000 (Chantal’s pre-tax monthly income)

$800 (credit card minimum payments) 

 

$2,300 (total expenses)

$5,000 (total income)

Chantal’s current DTI 

$2,300 ÷ $5,000 = .46 (46%)

For many people, a 46% DTI is too high to live comfortably. Spending that much of your income on housing and debt leaves little for taxes, utilities, food, healthcare, household expenses, savings, or fun. 

But what if Chantal consolidates her credit cards with a $20,000, five-year personal loan at 8% interest?

Expenses

Income

$1,500 (housing)

$5,000 (Chantal’s pre-tax monthly income)

$406 (debt consolidation loan)

 

$1,906 (total expenses)

$5,000 (total income)

Chantal’s DTI with the new loan

$1,906 ÷ $5,000 = .38 (38%)

After consolidating her credit card debt, Chantal’s credit card balances are zeroed out and the $800 in credit card payments goes away. The new loan payment is $406. Chantal’s expenses now total $1,906 and her DTI drops to 38%. That’s a much better DTI for long-term financial security.

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Why is DTI important?

DTI isn’t just important to lenders. It matters even more to you. Your DTI is a snapshot of how doable your lifestyle is at any given time. 

What is a low DTI?

Most lenders consider 36% or lower to be very healthy, and of course, lower is always better. 

A low DTI means you can probably afford the required payments in your life. When your DTI is low, there’s money left over that you can use to pay household expenses, save for the future, cover unexpected costs, and (yay) have fun without wrecking your wallet.

What is a high DTI?

Anything over 43% is considered high-ish. It’s a limit established by many mainstream lenders. However, people get loans with a DTI over 43%, and even over 50%, every day. It depends on the overall strength of your finances and the type of loan you’re after.  

A high DTI can make it harder to borrow. The world won’t end if you have one, but it’s something to watch, and something you’ll probably want to work on. If you have a high DTI, the lender may need to see other evidence of financial stability before approving your loan.

DTI and home loans

Mortgage lenders, including home equity lenders, look closely at your DTI when you borrow. In the past, many lenders set 43% as a cut-off for mortgage approval. However, not every lender or loan program applies this limit today. In fact, FHA (Federal Housing Authority) mortgages allow a DTI up to 57% for eligible applicants. 

If your DTI is higher than 43%, the best thing to do is talk to a mortgage advisor who can help you learn about your options. 

DTI and personal loans

The way personal loans work is ultimately up to each lender that offers them. Providers vary widely in what DTIs they’re willing to accept. The typical maximum is 35% to 40%. However, some lenders will go as high as 50%. DTI is just one part of your application. The lender will evaluate your income, your credit standing, the reason you need a loan, and other factors. 

Tips for improving DTI and increasing loan eligibility

There are several ways to improve your DTI. Generally, they fall into one of these three categories:

Debt consolidation is a fast fix if the consolidation loan has a lower payment than the loans it replaces. You can reduce what you pay each month by getting a loan with a lower interest rate and/or a longer repayment term. Similarly, refinancing a loan with a high payment to one with a lower payment reduces your DTI. Of course, neither of these solutions makes your debt go away. 

That’s where a long-haul plan comes in. You can improve your DTI without taking on a new loan. Get a budget together and set some goals. To pay off your balances over time, you’ll need to be mindful about spending. 

Once you’ve got your plan in place, make it stick. Check your balances and DTI every month. Do your best to stay on track and don’t forget to celebrate your progress. Use an app to help you. The Achieve MoLO app tracks your income and expenses to help you find ways to end up with more money left over at the end of the month. That could help you pay down your debt faster.

Gina Freeman - Author

Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.

James Heflin - Author

James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.

Frequently asked questions

DTI is a calculation. It’s your monthly housing and debt payments divided by your monthly pre-tax income. DTI shows how much of your income you spend on housing and required payments. DTI also shows lenders if you can afford a new payment when you apply for a loan.

A DTI under 36% is considered healthy and low. Most lenders allow DTIs up to 43% for most kinds of loans. Many mortgage loans allow a DTI above 50%, but it’s not as common for unsecured loans.

A DTI above 50% is common, especially in areas where housing is expensive, but it’s hard. Spending half of your pretax income on housing and debt service doesn’t leave you a lot of wiggle room. The rest of your income has to cover income taxes, food, utilities, transportation, school costs, hobbies, household goods, clothing, and anything else. That said, some people manage at a 50% DTI by being ruthless with their budgets. Consider targeting a lower DTI over time to make your life more comfortable and secure.

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