Why a Healthy Debt-to-Income Percentage Matters & How to Find Your DTI

Amy Lyons
Businessperson on a curved road heading toward a dollar sign in the sky.

Understanding debt-to-income ratio (DTI) can help calculate the amount of money you may have left over after paying your bills. This is important for creating a budget, setting and reaching fiscal goals, and building credit. It will also affect your ability to apply for loans or lines of credit. You can calculate your debt-to-income ratio using the formula:

Total monthly debt ÷ total monthly income = DTI ratio.

Table of Contents

What Is a Debt-to-Income Ratio?

Your debt-to-income ratio is the sum of all of your monthly debt payments divided by your gross monthly income, or your pre-tax income, expressed as a percent. Monthly payments may include:

  • Housing: rent, mortgage, etc;
  • Debts and loans: auto, student, personal;
  • Child support or alimony.

What Is a Good Debt-to-Income Ratio?

Lenders generally view lower DTI ratios as favorable. The lower the DTI, the more money left over after paying expenses.

Experts say:

  • A good DTI is around 36% or less;
  • A fair DTI with opportunity to improve may range from 37% to 49%;
  • A DTI of 50% or higher may limit funds and opportunities to save for unforeseen expenses.

A higher debt-to-income ratio may postpone the ability to receive a loan until the DTI has been lowered by either increasing income or decreasing debt. It is also important to note that monthly expenses such as groceries, gas, memberships, etc. are not calculated in the DTI and should be personally accounted for when considering the cost of monthly loan payments.

What Is Debt-to-Income Ratio Used For?

Banks, credit card companies, and other lenders use DTI to decide whether to lend consumers money, how much they can borrow, and at what interest rate. How DTI affects a specific lending/credit decision depends on the specific type of loan a consumer applies for.

Debt-to-Income Ratio and Mortgage

While the ideal DTI for a mortgage is as low as possible or 36%, the Consumer Financial Protection Bureau notes that 43% is in most instances the highest DTI a borrower can have and still safely receive a Qualified Mortgage. Lenders often prefer no more than 28% of a person’s income going into servicing a mortgage or rent payment.

Debt-to-Income Ratio and Student Loans

Student loans that increase a DTI may affect approval for other types of loans, making financial goals problematic to achieve. There are a few options that may help alleviate monthly expenses with student loans to lower a person’s DTI, such as adjusting monthly payments, or student loan refinancing. Taking time to pay off student loans, saving for a larger down payment, and having two secure years of employment history will increase your likelihood of receiving a mortgage loan.

How Does Debt-to-Income Ratio Affect Your Credit Score?

An individual’s debt-to-income ratio does not directly influence their credit score. Creditor agencies are not aware of the amount of money made by the borrower; they are only aware of credit utilization, the debit-to-credit ratio which accounts for credit balance vs. credit limit.

How to Calculate Debt-to-Income Ratio

Calculating the debt-to-income ratio divides total monthly debt by gross monthly income, and then multiply the decimal by 100 to get a percent.

Debt-to-income = total monthly debts ÷ gross monthly income.

For example, let’s say a person makes $3,750 gross income per month but has to pay $1,500 per month in bills and debts. Since 3,750 divided by 1,500 is .40, this person would have a DTI ratio of 40%.

If a bank is considering an applicant for a mortgage or a loan, they may further divide monthly expenses into two ratios, the front-end ratio, and the back-end ratio.

The front-end ratio, also known as the housing ratio, calculates how much of a person’s gross monthly income is currently going towards housing or calculated housing expenses (if a mortgage is taken on), divided by total gross monthly income. 

Housing expenses may include mortgage payments and principal, mortgage insurance and interest payments, property taxes, and association fees. These expenses can be calculated as expected expenses — not just current expenses — to ensure that the loan applicant will have the financial stability to continue making payments on the loan.

The front-end ratio is the housing expenses divided by gross monthly income (x100 to create a percent).

The back-end ratio is, in essence, the debt-to-income ratio but is specifically calculated in tandem with the front-end ratio to approve mortgages. Mortgage underwriters calculate the back-end ratio by adding together an applicant’s total monthly debt payments divided by the sum of monthly gross income. Monthly debts that may be calculated may include current mortgage payments including interest, insurance and taxes, as well as debt and loan payments, child support, or alimony.

The back-end ratio is the total monthly debt divided by gross monthly income (x100 to create a percent).

DTI Online Calculator

This online DTI calculator will provide an in-depth approach using both front-end ratio and back-end ratios.

How Do You Lower Your DTI?

A high DTI may indicate that a borrower is too high-risk to finance. Lowering your DTI by focusing on your financial health may improve your chances at qualifying for a loan or mortgage.

These tips may help you reach your financial goals and improve your DTI:

  • Keeping a budget with a goal;
  • Smart saving and spending;
  • Paying off debts or consider lowering interest rates with refinancing to make them more affordable;
  • Improving and maintaining a good credit score;
  • Avoiding taking on too much debt;
  • Increasing your income.

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