If you’re not familiar with debt-to-income ratios, read on to learn what they are and how to calculate yours.
Your debt-to-income ratio is the amount of money you spend on debt payments (like student loans and credit) cards each month compared to your monthly pre-tax income. DTI is expressed as a percentage, and it’s often used by lenders to determine your ability to repay mortgages and other loans.
Calculating your debt-to-income ratio is easier than you think. Here’s how you do it by hand:
To calculate your DTI, you’ll need to add up all of your monthly debt payments, including housing costs (rent or mortgage), car payments, student loans, child support, and credit card minimums.
Here’s an example calculation:
Add up your monthly debt payments: $1,000/mo. mortgage, $500/mo. in student loans, and a $250/mo. car payment.
$1,000 + $500+ $250 = $1,750 total debt payments
Continuing the example calculation:
Let’s say that before taxes, you make $5,000/mo.
$1,750 / $5,000 = 0.35
Your DTI is 35%
Your debt-to-income ratio (also known as back-end ratio) is one of the main factors that determine your eligibility for a mortgage. If it’s too high, you may struggle to get approved because lenders see you as a risk. Most lenders prefer to work with borrowers whose DTI is 36% or less, but you may be able to qualify with a debt load as high as 43%.
There’s also a second ratio that lenders consider — your mortgage-to-income ratio (also known as front-end ratio). It compares your total housing costs, including your mortgage payments and property taxes, to your gross monthly income. It’s calculated by dividing your housing costs by your monthly income before taxes. Lenders use your mortgage-to-income ratio to figure out if you’ll be able to afford the home you want to buy. You’re most likely to be approved for a home loan if your mortgage-to-income ratio is less than 28%.
Your debt-to-income ratio doesn’t have an effect on your credit score because your income doesn’t show up on your credit report. But your credit utilization ratio, which is a measure of how much debt you owe compared to your current credit limit, is a big factor in determining your score. So if you want to maintain good credit, you should limit how much debt you take on.
Your debt-to-income ratio is also taken into consideration when you apply for personal loans and other forms of credit. If you have a high DTI, you may have trouble getting approved for loans or might receive a higher interest rate because lenders view you as a risk.
The maximum debt-to-income ratio for mortgages is 43%. But generally, debt-to-income ratios over 40% aren’t considered good — they’re viewed as a sign of financial stress. So if you want to maintain your financial health and qualify for loans with the best rates and terms, you should keep your DTI under 36%.
There are two main ways to lower your debt-to-income ratio — increasing your income and paying down debt. You can bring in extra money by picking up a side hustle, taking on more hours at work, or asking your boss for a raise.
If you don’t have enough time to devote to a side job, you can try to reduce your debt instead. Take a look at your current expenses and see if there’s anything you can cut out. Use that extra money to pay down your debt, starting with the smallest loans first.
Even if you can’t find extra room in your budget or bring in more money, you may be able to lower your DTI by refinancing your loans. If you’re able to get smaller monthly payments, you’ll be able to lower your DTI without adjusting your budget.
Your debt-to-income ratio can affect your ability to qualify for everything from mortgages to credit cards, so keeping it in check is important. If you’re not sure what yours is, you should calculate it by adding up your debt payments and dividing them by your monthly income. If you discover your debt-to-income ratio is above or approaching 36%, you may want to work on lowering it by increasing your income or paying down some of your debt.
What is the debt-to-income ratio to qualify for a mortgage?
The maximum debt-to-income ratio that mortgage lenders usually accept is 43%. But many lenders prefer to work with borrowers who have a DTI of 36% or less.
How can I lower my debt-to-income ratio quickly?
To lower your DTI quickly, you’ll need to make more money and pay down some of your debt. Try to bring in extra income by picking up a side job and use the money to pay off your loans faster.
What is the 28/36 rule?
The 28/36 rule is a guideline for how much debt you should have. It’s used by many mortgage lenders to determine your eligibility for a home loan. It states that your total housing costs, including your mortgage payment, shouldn’t exceed 28% of your gross monthly income. Additionally, all of your monthly debt payments shouldn’t take up more than 36% of your income.
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By LaToya Irby LaToya Irby LaToya Irby is a credit expert who has been covering credit and debt management for The Balance for more than a dozen years. She's been quoted in USA Today, The Chicago Tribune, and the Associated Press, and her work has been cited in several books. LEARN ABOUT OUR EDITORIAL POLICIES...