Debt-to-Income Ratio

Debt-to-income ratio (DTI) is a personal finance measure that compares your debt payment to you overall income. DTI is a way that lenders can measure your ability to manage your monthly payments and pay off debt. It is calculated by dividing your monthly recurring debt by your gross monthly income, and is expressed as a percentage.

What Monthly Payments are Included?

• Monthly:
  • mortgage payments
  • time share payments
  • personal loan payments
  • car payments
  • student loan payments
  • credit card payments
  • personal loan payments
  • child support payments
  • alimony payment
• If escrowed, monthly expense for real estate
• If escrowed, monthly expense for home owner’s insurance
• Co-signed loan monthly payments

What Shouldn’t be Included?

• Monthly utilities, such as water, electricity, water, or gas bills
• Car insurance expenses
• Cable bills
• Cell phone bills
• Health insurance costs
• Groceries/food or entertainment expenses

If you are unsure about what to consider when calculating your DTI, ask your lender!

What Sources of Income?

• Wages
• Salaries
• Child support or alimony
• Tips and bonuses
• Pension
• Social Security
• Any additional income

What Should Your DTI Be?

A low debt-to-income ratio demonstrates that you have a good balance between debt and income. A high debt-to-income ratio demonstrates that you have too much debt for the income you have. Lenders are more likely to loan to borrowers that have lowers DTIs. In general, lenders look for borrowers who have a DTI lower than 36%. The lower the number your DTI is, the better chance you have at getting a loan.

DTI Percentages

35% or lower: You’re looking good!

• If your DTI is 35% or lower, your debt is at a manageable level relative to your income. This means you most likely have more left over for saving or spending after you’ve paid your bills.

36% – 49%: You’ve got opportunity to improve!

• If your DTI is in this range, it means your managing your debt adequately, but you may want to consider lowering your DTI. If you’re looking to borrow, lenders may ask to see additional criteria to determine your eligibility.

50% or more: It’s time to take action!

• A DTI of 50% or more means that more than half of your income is going towards debt payments. This shows lenders that you may not have much money left over to save, spend, or handle any additional expenses that come your way. Lenders may limit your borrowing options if you have a DTI 50% or above.