Debt-to-income ratio: what it is and how to calculate yours

What DTI measures

Your debt-to-income ratio is the share of your monthly gross income, before taxes and deductions, that goes to required debt payments. If you earn $6,000 a month before tax and your debt payments add up to $1,800, your DTI is 30%.

Lenders use it because it shows how much room you have to take on a new payment. Two people with the same income can look very different: one with no debts has all of it available, the other with a car loan, student loans and card payments may already be stretched.

How to calculate it

Add up your monthly debt payments, divide by your gross monthly income, and multiply by 100.

• Include: rent or mortgage payment (with property tax and insurance if they are part of it), car loans, student loans, personal loans, the minimum payment on each credit card, child support or alimony you pay, and any other loan with a required monthly payment.
• Leave out: utilities, groceries, phone bills, insurance you pay separately, subscriptions and other living costs. They matter for your budget, but DTI only counts debts.
• For credit cards, use the minimum payment on your statement, not your balance or what you happen to pay.
• For income, use gross pay. If your income varies, lenders usually average it over a period such as the last two years.

A worked example

Say your gross pay is $5,500 a month. Your rent is $1,400, your car loan $380, your student loan $220, and your two credit cards have minimums of $65 and $45. Total debt payments: $2,110.

$2,110 divided by $5,500 is 0.384, so your DTI is about 38%. If you paid off the smaller card, it would drop to about 37.5%. If you paid off the car loan, it would fall to about 31%, which shows why large fixed payments matter much more than small ones.

Front-end and back-end DTI

Mortgage lenders often look at two versions. Front-end DTI counts only housing costs: the proposed mortgage payment plus property tax, insurance and any association fees. Back-end DTI counts housing plus every other debt payment. The back-end number is the one people usually mean by DTI.

What counts as a good DTI?

There is no single cutoff. Limits vary by lender, by loan type and by the rest of your application, including your credit history and savings. In general, the lower the better: a low DTI means more room in your budget and usually better loan terms, while a high one means a lender may approve a smaller amount, charge more, or decline.

For your own finances, a rising DTI is a warning sign even if no lender is involved. It means a growing share of every paycheck is committed before you buy groceries.

How to lower it

There are only two levers: smaller debt payments, or more income.

• Pay off a debt entirely. Eliminating a payment lowers DTI more than reducing a balance, because a card minimum shrinks slowly as the balance falls, while a paid-off loan removes its payment completely.
• Target the loan closest to the finish line if you are preparing for an application soon. A car loan with a few payments left can often be cleared quickly and removes a large payment.
• Avoid new debt before applying for a big loan. A new car or furniture financing in the months before a mortgage application can push your DTI over a lender's limit.
• Add documented income. A raise, a second job or a co-borrower raises the denominator, but lenders usually want to see a history of it.