What is Debt to Income Ratio?

Debt-to-income ratio (DTI) is the percentage of your monthly gross income that goes toward paying debts.

It's calculated by dividing your total monthly debt payments by your monthly gross income.

How DTI works

Your DTI gives lenders a quick snapshot of your financial health. It shows whether you can comfortably handle your existing debts plus any new loan payments.

For mortgage applications, lenders look at two types:

• Front-end DTI: Only includes housing costs (mortgage, property taxes, insurance)

• Back-end DTI: Includes all monthly debt payments (housing, credit cards, auto loans, student loans)

What's considered a good DTI?

A back-end DTI of 35% or less shows you're managing debt well.

Most lenders accept DTIs up to 50%, though you might still get approved with a higher ratio, but expect higher interest rates and fees.

How to calculate your DTI

Calculating your debt-to-income (DTI) ratio is straightforward.

You simply divide your total monthly debt payments by your gross monthly income, then multiply by 100 to get a percentage.

Step-by-Step Calculation

1. Add up all your monthly debt payments, including:

   • Mortgage or rent

   • Car loans

   • Student loans

   • Credit card minimum payments

   • Personal loans

   • Other debt obligations (like child support)

2. Determine your gross monthly income (before taxes and deductions):

   • Regular salary or wages

   • Self-employment income

   • Rental income

   • Alimony or child support you receive

   • Other regular income

3. Divide your total monthly debt by your gross monthly income

4. Multiply by 100 to convert to a percentage

Example Calculation

Let's say you have:

• $1,500 monthly mortgage payment

• $350 car loan payment

• $250 student loan payment

• $200 credit card minimum payments

• $5,000 gross monthly income

Total monthly debt: $2,300
Gross monthly income: $5,000

DTI = ($2,300 ÷ $5,000) × 100 = 46%

In this example, your DTI would be 46%, which is getting close to the upper limit of what many lenders consider acceptable.

Things to Remember

• Use minimum required payments for credit cards, not your typical payment

• Include only debt obligations, not regular expenses like groceries or utilities

• Always use gross (pre-tax) income

• For mortgage applications, lenders typically calculate both front-end DTI (housing costs only) and back-end DTI (all debts)

Why DTI matters

Loan Approval

Lenders use DTI alongside your credit score and history to decide whether to approve your application. A high DTI could mean higher interest rates or loan rejection.

Loan Options

Different loans have different DTI requirements. With a DTI in the mid-40s, you might qualify for credit cards, auto loans, or personal loans.

Some mortgage lenders might work with you, but others won't. Above 50%, your options shrink significantly.

Financial Health

High debt payments limit what you can put toward savings, emergencies, and retirement. When debt eats up more than half your income, keeping up with bills becomes tough.

DTI and your credit score

Your DTI doesn't directly affect your credit score because income isn't part of credit scoring models.

However, reducing your DTI can indirectly improve your score by:

• Lowering credit utilization when you pay down credit cards

• Reducing your total debt when you pay off loans

How to improve your DTI

1. Cut back on credit card use before applying for loans

2. Pay off small loan balances when possible

3. Avoid taking on unnecessary new debt

4. Consider consolidating high-interest debts into a single lower payment

5. Look to increase your income through raises, overtime, job changes, or side work

Finding your financial balance

A healthy DTI isn't just about qualifying for loans—it's about creating sustainable financial habits. By keeping your debt obligations in check relative to your income, you create more room for saving, investing, and handling life's unexpected expenses.

Tracking your DTI regularly can serve as a personal financial health check, helping you make smarter money decisions before debt becomes overwhelming.