Updated: July 26, 2024
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Your debt-to-income ratio (DTI) is a key metric that lenders use to assess your ability to manage new debt payments. This ratio is critical for underwriters, who evaluate your total and mortgage-specific debt to decide the terms you’re eligible for. Homeowners can calculate their mortgage debt-to-income ratio to understand how much of their income is specifically dedicated to mortgage debt.
Provide your income and recurring payments to calculate your DTI.
Enter all applicable payments to ensure accurate results.
Input | What you should enter |
|---|---|
Gross Monthly Income | Your earnings before taxes and other deductions (401K, health insurance, etc.). This also includes commissions or returns from investments. Take your total earnings for the year and divide by 12 to arrive at your average monthly income. |
Monthly Credit Card Payment | The total amount you are required to pay each month toward credit cards. Include only the required minimum payments here, even though you may be paying more each month. |
Monthly Car Payment | The total amount of minimum payments you're required to pay each month toward auto loans. |
Monthly Student Loan Payment | The minimum monthly payment required on your student loan. |
Other Monthly Debt Payments | This is a total of your required minimum monthly payments on other debts. It may include personal loans, payments toward medical costs, alimony or child support, subscriptions, etc. |
Estimated Mortgage Payment | Use your current or estimated monthly mortgage payment here, including escrow deposits, insurance and homeowners' association fees. |
Output | What it means |
|---|---|
Total Monthly Debt Payments | The total amount of monthly payments you make toward revolving and installment debts. |
Your back-end DTI | A complete debt-to-income ratio, this is the percentage of mortgage and other fixed-payment debts you pay relative to your income. This broad figure provides a full picture of your ability to take on more debt. |
Your front-end DTI | Your mortgage-to-income ratio. The front-end DTI is your projected monthly mortgage payment — including principal, interest and taxes — divided by your monthly gross income. |
Lenders use your debt-to-income ratio (DTI) to evaluate your capacity to manage new debt payments. A calculator provides a convenient way to estimate this figure, but manually calculating it can help you better understand and itemize your own cash flow. Emma, a freelance graphic designer planning to buy her first home, needs to understand her DTI ratio since it influences her mortgage options and interest rates. Here’s how Emma calculates it:
Emma begins by listing all her recurring monthly debt payments, such as her car loan ($300), credit card minimum payments ($200) and student loan payments ($300). She excludes common household expenses such as utilities, cable and internet, car insurance and health insurance because they are not financial obligations stemming from borrowed funds. After adding these amounts, she finds her total monthly debt to be $800.
Emma then calculates her total monthly gross income (amount earned before taxes and deductions). As a freelancer, she sums up her payments from various clients, which can vary, but she uses an average based on the last six months to get $3,200.
To find her DTI ratio, Emma divides her total monthly debt ($800) by her monthly gross income ($3,200). The result is expressed as a percentage, which shows the proportion of her income dedicated to debt repayment. Emma’s DTI ratio is about 25%.
A good debt-to-income (DTI) ratio can vary widely among lenders and loan types, but in all cases, it serves as a benchmark for securing favorable loan terms. Here’s a table that breaks the differences down in detail:
Loan Type | Preferred DTI Ratio | Considerations |
|---|---|---|
36% to 43% | May go up to 50% with a high credit score, cash reserves or additional income. | |
≤ 43% | Government-backed, with specific limits on housing costs and total debt. | |
≤ 41% | Set by the Department of Veterans Affairs, may vary by lender. | |
35% to 40% | Higher DTI may be acceptable with strong credit. | |
≤ 43% | High credit scores may lessen DTI constraints. |
The 28/36 rule is a guideline used by conventional lenders to assess a borrower's ability to repay the loan. It suggests that no more than 28% of your gross monthly income should be spent on housing expenses, and your total debt payments shouldn't exceed 36% of your income. Adhering to this rule can help you maintain a healthy debt-to-income ratio, enhancing your eligibility for preferred loan terms and interest rates.
So now you know how to calculate your DTI ratio and what you need to target for most loans. However, besides influencing the underwriting process, this ratio also affects your broader financial picture. Here’s how:
Lenders assess any loan application using your DTI ratio
A high DTI indicates potential difficulty in managing new loan payments. They combine DTI with your credit score and income to evaluate risk and determine loan amounts.
DTI affects the types of loans you can access
Specific loan types have set DTI limits. For instance, while a DTI above 36% might disqualify you from certain conventional mortgages, it could still be acceptable for FHA loans.
High DTI can impede your financial goals
Carrying a high debt load limits disposable income, making it harder to fund an emergency reserve or build retirement savings. If over 50% of your income goes to debt, reducing your DTI should be a priority.
While your DTI ratio may not always align with your goals, it's not set in stone. There are practical steps you can take to improve it. Here are some you may want to consider:
Boosting your monthly earnings through side gigs or a higher-paying job can decrease your DTI ratio by widening the gap between your income and debt obligations.
Aggressively reducing your debt balances lowers the monthly payments, contributing to your DTI ratio.
Postponing large purchases or avoiding new credit lines keeps your debt level stable.
Consolidating debts or refinancing to lower interest rates can reduce your monthly payments, lowering your DTI ratio.
Create a tighter budget or apply budgeting methods like the 50/30/20 rule or zero-based budgeting. These can optimize your spending, freeing up funds to pay down debt faster and lowering your DTI ratio over time.
About Zachary Romeo
Zachary Romeo is the Head of Loans and Banking at MoneyGeek, with over 10 years of experience and forthcoming certification as a Commercial Banking and Credit Analyst (CBCA). Previously, he led production teams for some of the largest online informational resources in higher education.
Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt through people-first content.
