Key takeaways
- To calculate your debt-to-income ratio, add up your monthly debt payments and your gross monthly income and then divide your debt by your gross income.
- While every lender and product will have different ranges, a DTI nearing 50 percent is generally considered high by most companies.
- Your DTI greatly impacts your ability to get approved for a loan or mortgage.
Your debt-to-income ratio (DTI) is your total monthly debt payments divided by your total gross monthly income. It helps lenders determine your approval odds and the likelihood of you being able to make your monthly payments.
The higher your DTI, the more debt you have compared to your income, which signals to lenders that you may struggle to cover debts and other expenses. The lower your DTI, the more lenders see you as a reliable borrower.
Step one: Add up your monthly debts
Start by adding up all your debts listed on your credit report, including:
- Auto loan payments
- Child support and alimony payments
- Credit card payments
- Home equity loan payments
- Home equity line of credit payments
- Line of credit payments
- Mortgage payments
- Personal loan payments
- Store card payments
- Student loan payments
- Timeshare payments
In addition to your personal debts, you should also include any joint accounts or co-signed loans.
Use your monthly payment for fixed-rate loans like personal loans and auto loans. Use your minimum monthly payment for variable-rate accounts like credit card payments or a home equity line of credit.
For your mortgage, calculate the full PITI — principal, interest, taxes and insurance. This will be your regular monthly payment if you escrow your taxes and insurance. If you don’t escrow, your lender will likely take your annual tax and insurance payments, divide them by 12 and include them as part of your mortgage payment for purposes of your DTI calculation.
Here is an example of what it could look like after considering these monthly debts:
- Mortgage: $1,600
- Auto loan: $300
- Minimum credit card payments: $300
- Student loan: $200
Total monthly debts: $2,400
Step two: Add up your monthly gross income
Next, add up your monthly gross income. This should include wages from any traditional jobs as well as any gig or freelance work you do. However, you do not need to include payments like alimony or child support unless you want that to be considered by the lender.
If you are a W-2 employee, documentation will likely come from your W-2 form or your last several pay stubs. If you are self-employed or have income from a side hustle, your lender will likely look at your business tax returns.
If you have money coming in from a side hustle but don’t have a business tax return or other documentation, your lender may not allow you to use that income as part of your DTI calculation, though some may allow bank statements with regular deposits.
If you have properties you rent out, you need to include them in your income as well. The mortgage payments on your rental properties are included as part of your monthly debts, but you may not be able to use all of the rental income as part of your income calculation. Many lenders will only allow you to count 75 percent of the monthly rent towards income. That leaves a buffer for maintenance and vacancies.
Here is how those calculations could go:
- Monthly gross income from day job: $5,000
- Side hustle monthly gross income: $1,000
Total monthly gross income: $6,000
Step three: Divide your monthly debts by your monthly gross income
For this example, divide your monthly debt payments ($2,400) by your total monthly gross income ($6,000). In this case, your total DTI would be 0.40, or 40 percent. To confirm your number, use a DTI calculator.
What is a good debt-to-income ratio?
The higher your DTI, the riskier you appear to lenders. Each lender has different DTI standards you must meet to qualify for a loan, but according to credit.org most lenders see a DTI under 36 percent or less as “ideal” while 37 percent to 42 percent is seen as “acceptable.”
Typically, a DTI of 50 percent or more will make it difficult to get approved with most lenders. If your DTI is a bit lower — between 36 and 49 percent — but is over 43 percent, you may want to consider paying off some of your debt before taking out another loan.
Keep in mind that the requirements differ for each lender and the type of loan you take out so read the minimum requirements and eligibility criteria carefully before applying. For example, the lender’s maximum DTI for a mortgage might not be the same as its maximum DTI for a personal loan, so research the lender’s eligibility distinctions and where your DTI lands.
Bottom line
Lender’s take your DTI very seriously — it’s one of the primary approval considerations for a loan. If your DTI is above 50 percent, it may be harder to get approved for additional credit, so do your best to lower your DTI before taking on any new debt if possible.
A lower DTI will not only help you qualify for a loan but may also help you get a lower interest rate. You can improve your DTI by lowering expenses to make higher debt payments, increasing your income or consolidating debts at a lower interest rate. If you are having trouble making payments, you may want to consider what debt relief options are available to you.
Frequently asked questions
After calculating your debt-to-income ratio (DTI), check the lender’s requirements. If your DTI is well below 43 percent or the lender’s threshold and you meet other eligibility criteria, you can move forward with the application process. Otherwise, hold off until you can pay down your balances and get your DTI to an acceptable level.
While some lenders may allow a DTI of 50 percent or higher, this might signal a red flag for predatory lending practices. But even if the lender is legitimate and not engaging in misleading communication, taking on more debt with a high DTI is likely not the best bet for your overall financial health.
If your DTI disqualifies you for a loan, you should focus on reducing it. Evaluate your spending plan, minimize expenses and use these funds to make extra payments towards your debt each month. Stop using credit cards or opening new credit accounts while paying down balances.
To make the repayment process more streamlined or organized, consider looking into debt consolidation. A debt consolidation product, like a loan (if you qualify for a lower rate) or a 0 percent APR credit card. Be sure to recalculate your DTI regularly so you’ll know when it’s at a percentage that’s acceptable to the lender.
It is not necessary to notify lenders if your DTI changes. However, credit card issuers may calculate this figure if you apply for a credit limit increase. Current lenders will also compute your DTI if you apply for an additional debt product.
Income is not included in any credit report, so your DTI does not impact your credit score. However, if you have a large amount of debt or a high credit utilization ratio — meaning your accounts are maxed out — your score may be negatively impacted even if your DTI is proportionately low.
