What Is a Good Debt-to-Income Ratio? | LendingTree (2024)

Debt Consolidation

How Does LendingTree Get Paid?

LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

How Does LendingTree Get Paid?

LendingTree is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). LendingTree does not include all lenders, savings products, or loan options available in the marketplace.

What Is a Good Debt-to-Income Ratio? | LendingTree (1)

Amanda Push

Amanda Push is a Colorado-based editor who has covered topics including personal finance, travel, insurance and technology.

More from the writer

What Is a Good Debt-to-Income Ratio? | LendingTree (2)

Denny Ceizyk

Denny Ceizyk is a former senior writer at LendingTree. He contributes 25 years of mortgage industry experience to writing content that empowers and educates consumers on how to make the best mortgage decisions.

More from the writer

What Is a Good Debt-to-Income Ratio? | LendingTree (3)

Jessica Sain-Baird

Jessica Sain-Baird is a managing editor at LendingTree. She has a bachelor’s degree in journalism and master’s degree in digital content strategy.

More from the editor

What Is a Good Debt-to-Income Ratio? | LendingTree (4)

Xiomara Martinez-White

Xiomara Martinez-White is a copy editor at LendingTree and its associated companies. She is a graduate of the CUNY Graduate School of Journalism.

More from the editor

Updated on:

Content was accurate at the time of publication.

We are committed to providing accurate content that helps you make informed money decisions.Our partners have not commissioned or endorsed this content.Read our

Editorial Guidelines

At LendingTree, we are committed to providing accurate and actionable content that helps you make informed decisions about your money. Our team of writers and editors follows these key guidelines:

  • We thoroughly fact-check and review all content for accuracy. We aim to make corrections on any errors as soon as we are aware of them.
  • Our partners do not commission or endorse our content.
  • Our partners do not pay us to feature any specific product in our content, but we do feature some products and offers from companies that provide compensation to LendingTree. This may impact how and where offers appear on the site (such as the order).
  • We review and interview both external and internal reputable sources for our content and disclose sourcing in our content.
.

Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It’s calculated by dividing your monthly debts by your gross monthly income. Generally, it’s a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

On this page

  • What is a good debt-to-income ratio?
  • Debt-to-income ratio for mortgage
  • How to calculate your debt-to-income ratio
  • Debt to income ratio mortgage calculator
  • Can your debt-to-income ratio impact your credit?
  • How your debt-to-income ratio affects you
  • How to lower your debt-to-income ratio

What is a good debt-to-income ratio?

As a general rule of thumb, it’s best to have a debt-to-income ratio of no more than 43% — typically, though, a “good” DTI ratio is below 35%. Your DTI ratio is made up of two parts:

  • Front-end ratio: Sometimes referred to as the “housing ratio,” your front-end ratio refers to what part of your income goes toward housing costs. This can include rent or mortgage payments, homeowners or renters insurance and property taxes.
  • Back-end ratio: This refers to the percentage of your income that goes toward all of your monthly debt obligations, including housing. This can cover your car loan, credit card bills and student debt.

Your DTI ratio helps creditors determine whether you can afford new debt. It plays a major role in your creditworthiness as lenders want to make sure you’re capable of repayment. Each lender will have its own criteria around what DTI ratio you can have to qualify for credit.

Debt-to-income ratio of 35% or less

The lower your DTI ratio, the more positively lenders may view you as a potential borrower. A DTI ratio that’s below 35% indicates to lenders that you have savings and flexibility in your budget — it may also indicate that you have a good credit score, though this isn’t always the case.

Debt-to-income ratio of 36% to 49%

If you have a DTI ratio between 36% and 49%, this means that while the current amount of debt you have is likely manageable, it may be a good idea to pay off your debt. While lenders may be willing to offer you credit, a DTI ratio above 43% may deter some lenders.

Debt-to-income ratio of 50% or more

If you have a DTI ratio that’s over 50%, you might be in some financial hot water. It may be wise to seek solutions like credit counseling to help you better manage your debt. A credit counselor can enroll you in a debt management plan and work with your creditors to lower your rates and monthly payments.

Debt-to-income ratio for mortgage

Mortgage lenders pay extra attention to your DTI ratio when it comes to buying or refinancing a home. They scrutinize both your front-end and back-end DTI ratios, and could deny your home loan request if you carry too much debt compared with your income.

The Consumer Financial Protection Bureau (CFPB) suggests consumers cap their back-end DTI ratio at 43%; however, you shouldn’t rely on that to qualify for a mortgage. Lenders don’t consider expenses like family cell phone plans, car insurance for a new teenage driver or that college tuition bill coming up in a few years — avoid taking on a payment that’ll squeeze your budget.

DTI ratio requirements usually range between 41% and 50% depending on the loan program you apply for. The guidelines tend to be more strict if you’re taking out a conventional loan versus a mortgage backed by a government agency, like an FHA loan from the Federal Housing Administration (FHA) or a VA loan from the U.S. Department of Veterans Affairs (VA).

How to calculate debt-to-income ratio

To calculate your debt-to-income ratio, follow this step-by-step process:

  1. Add up your monthly debts, like your rent or mortgage, car loan, credit card bills and student loans.
  2. Calculate the gross monthly income you bring in — this is how much money you bring in before taxes and deductions. You can figure your gross monthly income by:
    • Dividing your annual gross salary by 12
    • Multiplying your hourly wage by 40 for the number of weeks you work, then multiplying that figure again by four for your monthly income
  3. Lastly, divide the total monthly debts you have by your gross monthly income. This will provide your DTI ratio.

Let’s say that each month, you have a $1,500 rent payment, $400 auto loan bill, $200 student loan bill and a $50 credit card bill. Totaled together, this adds up to $2,150 along with a gross monthly income of $5,000.

Here’s what that would come out to: $2,150 ÷ $5,000 = 43% DTI ratio.

In addition, here’s what your front-end and back-end debt-to-income ratios would look like:

  • $1,500 ÷ $5,000 = 30% front-end DTI ratio
  • $2,150 ÷ $5,000 = 43% back-end DTI ratio

Debt-to-income ratio mortgage calculator

Also known as a home affordability calculator, a DTI ratio mortgage calculator can give you a quick glimpse of what you can afford. You’ll need to have a rough idea of your monthly debt payments (credit cards, car loans, student loans) and how much of a down payment you’ll want to make.

Follow these steps to calculate how much home you can afford based on your DTI ratio:

  • Enter your annual income. Remember, this should be how much you make before taxes and deductions.
  • Add up and enter your monthly debt. A helpful qualifying tip: In the case of credit cards, only add up your minimum monthly payments (even if you pay extra).
  • Down payment. The higher your down payment, the lower your mortgage payment and DTI ratio will be.
  • Loan term. A longer term (30 years is the most common) will give you the lowest monthly payment and DTI ratio.
  • Pick your DTI ratio preference. LendingTree’s home affordability calculator is set to a 28% DTI ratio, but you can slide the bar up to 50% to see how much more house you’d be able to buy if you can afford the higher monthly payment.

If you’re not sure whether you can afford a home just yet, you can do some simple math to gauge where your DTI ratio is:

  • Choose the monthly housing payment you’d feel comfortable making
  • Add your monthly debt to the monthly mortgage payment
  • Divide the total by your monthly before-tax income
  • The result is your current DTI ratio

The example below puts these numbers in action, assuming you make $6,250 per month, have $400/month of debt and would like to keep your mortgage payment at $1,750 per month.

Add up your total debt$1,750 + $400 = $2,150
Divide the debt by your before-tax income$2,150 ÷ $6,250 =
The result is your current DTI ratio34.4%

How to lower your DTI ratio for a mortgage

If your DTI ratio is too high for loan approval, consider some of these options:

  • Make a higher down payment: Some options to obtain a higher down payment include saving for a bit longer, asking a relative for a gift or taking out a 401(k) loan.
  • Higher credit score: To boost your score, pay off credit card debt and avoid opening new credit accounts so you get the lowest possible mortgage rate and payment.
  • Stockpile some savings: Lenders may approve your loan with a higher DTI ratio if you can prove you have mortgage reserves to cover your payment if you hit a financial rough patch.
  • Shop for cheaper homeowners insurance: Your homeowners insurance premium has a direct impact on your mortgage payment — the lower it is, the lower your DTI ratio is.
  • Get a cosigner: Most mortgage programs allow you to borrow with someone else, even if they don’t plan to live in the home. Just make sure they understand they’re on the hook for the payment if for any reason you fall behind.
  • Buy a multifamily home: If you don’t mind being a homeowner and a landlord, you can buy a two- to four-unit home and use the rental income on the unit you don’t live in to reduce your DTI ratio.

Can your debt-to-income ratio impact your credit?

Your debt-to-income ratio isn’t recorded on your credit report, so it won’t directly impact your credit score. However, a high DTI ratio could indicate that you have a large credit utilization ratio, which will impact your credit score.

Credit utilization ratio is how much debt you have divided by the amount of credit you have access to. For instance, if you have a credit card with a $800 balance and a $2,000 limit, then your credit utilization ratio is 40%.

Your credit utilization ratio plays one of the largest roles in determining your credit scores. With the FICO Score model, credit utilization makes up 30% of your credit score. When it comes to your VantageScore, your credit utilization ratio is 20% of your credit score.

How your debt-to-income ratio affects you

Even though your debt-to-income ratio doesn’t show up on your credit report, it can still affect you if you try to borrow money:

  • Prevents you from taking out new credit: If you have a high DTI ratio, lenders may be cautious about lending you money. You may get denied for any new loans or revolving credit you apply for since you come with more of a risk in the eyes of lenders.
  • Costs you more money: If you have a high DTI ratio, lenders may view you as a riskier borrower. As a result, you may have to pay more in fees and higher interest rates. For instance, when buying a house, you may pay more in closing costs or end up with higher interest rates. In addition, a DTI ratio over 45% requires that you take out private mortgage insurance (PMI), which increases your DTI ratio even more.
  • Limits how much you can borrow: A high DTI ratio limits your budget when it comes to taking out new debt. For instance, a large DTI ratio limits how much you can spend on purchasing a house. To determine how much of a mortgage loan you can qualify for, use a home affordability calculator.

How to lower your debt-to-income ratio

A high debt-to-income ratio can inhibit you from new credit opportunities. If you want to lower your DTI ratio, consider the following strategies:

  • Aggressive monthly payments can cut down on your DTI ratio as long as you have the flexibility in your budget to do so. Two such strategies are the debt avalanche method — which advises consumers to pay off debts with the highest interest rates first — and the debt snowball method — which encourages consumers to pay off their smallest debts first.
  • Decreasing your mortgage payments can help reduce the cost of your largest monthly expense. You can lower your mortgage payment by using strategies like refinancing, getting a longer loan term or switching to an adjustable-rate loan.
  • Debt consolidation is the process of rolling all of your debts into a single personal loan. A debt consolidation loan can lower your monthly payments as long as you can qualify for a lower annual percentage rate (APR) or get a long loan term.
  • Credit card refinancing involves moving your debt to a balance transfer credit card, ideally with a 0% intro APR. While you can only do this with credit card debt, it can be a helpful way for you to save money — you can focus on paying down your balance, rather than interest, for the first few months.
  • Credit counseling is a low-cost strategy to get professional help to cut down on your debt. Credit counseling won’t hurt your credit and allows you to enter into a debt management plan with your creditors. A debt management plan can help you pay off your debt within three to five years.

What Is a Good Debt-to-Income Ratio? | LendingTree (5)

Get debt consolidation loan offers from up to 5 lenders in minutes

Debt Resources

Debt Consolidation Loan
Debt Consolidation Loans for Bad Credit
Debt Consolidation Calculator

Recommended Reading

How to Prequalify for a Personal Loan — And How It Differs From Preapproval

Updated December 18, 2023

There are many reasons why you may want to prequalify for a personal loan. If you’re considering personal loan prequalification, here’s what you need to know.

READ MORE

How Do Personal Loans Work?

Updated August 31, 2022

With fixed interest rates and set repayment periods, personal loans can be a simple way to borrow for many purposes. But how do personal loans work?

READ MORE

Personal Loan Scams: 5 Warning Signs

Updated December 4, 2023

To help protect yourself from any future hassle or headaches, it’s important to be aware and on the lookout for common warning signs of personal loan scams.

READ MORE

What Is a Good Debt-to-Income Ratio? | LendingTree (2024)

FAQs

What Is a Good Debt-to-Income Ratio? | LendingTree? ›

Debt-to-income ratio of 36% to 49%

What is an acceptable debt-to-income ratio? ›

35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.

Is a 20% debt-to-income ratio bad? ›

35% or less is generally viewed as favorable, and your debt is manageable. You likely have money remaining after paying monthly bills. 36% to 49% means your DTI ratio is adequate, but you have room for improvement.

Is 50% an acceptable debt-to-income ratio? ›

A good debt-to-income ratio is below 43%, and many lenders prefer 36% or below. Learn more about how debt-to-income ratio is calculated and how you can improve yours.

Is 11% debt-to-income ratio good? ›

10% or less: Shouldn't have trouble getting loans. May qualify for lower rates. 11% to 20%: Again, shouldn't have trouble getting loans. Time to scale back on spending.

What is too high for debt ratio? ›

Key takeaways

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

Is a debt ratio of 75% bad? ›

Interpreting the Debt Ratio

If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.

How to lower debt-to-income ratio quickly? ›

Pay Down Debt

Paying down debt is the most straightforward way to reduce your DTI. The fewer debts you owe, the lower your debt-to-income ratio will be. Suppose that you have a car loan with a monthly payment of $500. You can begin paying an extra $250 toward the principal each month to pay off the vehicle sooner.

Does rent count in debt-to-income ratio? ›

Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it's the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.

How much of my paycheck should go to credit card debt? ›

Today our question is, “How much debt is too much debt?” And really, at Consolidated Credit, we think any amount of debt is too much. But ideally you should never spend more than 10% of your take-home pay towards credit card debt.

Is a 22% debt-to-income ratio good? ›

Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

Is 49% debt-to-income ratio bad? ›

DTIs between 42% and 49% suggest you're nearing unmanageable levels of debt relative to your income. Lenders might not be convinced that you will be able to meet payments for another line of credit.

What is the highest DTI for a mortgage? ›

Most conventional loans allow for a DTI ratio of no more than 45 percent, but some lenders will accept ratios as high as 50 percent if the borrower has compensating factors, such as a savings account with a balance equal to six months' worth of housing expenses.

What is the average debt-to-income ratio in the US? ›

The Federal Reserve tracks the nation's household debt payments as a percentage of disposable income. The most recent debt payment-to-income ratio, from the third quarter of 2023, is 9.8%. That means the average American spends nearly 10% of their monthly income on debt payments.

What is the 28 36 rule? ›

According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.

What is a good credit score? ›

Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.

What is the max DTI for a conventional loan? ›

Most conventional loans allow for a DTI ratio of no more than 45 percent, but some lenders will accept ratios as high as 50 percent if the borrower has compensating factors, such as a savings account with a balance equal to six months' worth of housing expenses.

Is 30% debt ratio good? ›

A debt ratio between 30% and 36% is also considered good. It's when you're approaching 40% that you have to be very, very vigilant. With a threshold like that, you're a greater risk to lenders. You may already be having trouble making your payments each month.

Top Articles
Latest Posts
Article information

Author: Dr. Pierre Goyette

Last Updated:

Views: 5245

Rating: 5 / 5 (50 voted)

Reviews: 89% of readers found this page helpful

Author information

Name: Dr. Pierre Goyette

Birthday: 1998-01-29

Address: Apt. 611 3357 Yong Plain, West Audra, IL 70053

Phone: +5819954278378

Job: Construction Director

Hobby: Embroidery, Creative writing, Shopping, Driving, Stand-up comedy, Coffee roasting, Scrapbooking

Introduction: My name is Dr. Pierre Goyette, I am a enchanting, powerful, jolly, rich, graceful, colorful, zany person who loves writing and wants to share my knowledge and understanding with you.