What Is a Debt-to-Income Ratio?

Your DTI ratio is a number that helps mortgage bankers evaluate whether you’ll be able to afford your monthly payment if you take out a home loan.

Why do mortgage bankers look at DTI ratios?

Mortgage bankers care about your ability to repay the money you’re planning to borrow, and your DTI ratio is a helpful way for them to predict if you can keep up with the monthly payments. That’s why your DTI ratio will affect whether you’re approved for a mortgage. Different mortgage bankers and loan products have different limits for DTI ratios.

How To Calculate Your Debt-to-Income Ratio

Your DTI ratio is calculated by adding up all of your monthly debt payments and then dividing that total by your gross monthly income. The final number is expressed as a percentage.

We went over gross monthly income in our debt-to-income calculator, but what do your monthly debt payments include? As you’re reviewing your financial obligations, make sure to factor in things like your rent or mortgage, credit cards, auto loans, student loans, alimony, child support, and personal loans.

How To Improve Your DTI Ratio

To reduce your DTI ratio, look to your current debts and how you’re making money. These are steps you can take to help lower your DTI ratio:

• Pay down your credit card debt and other loan balances. One way to do this is by consolidating high-interest debts.
• Avoid adding new debt to your plate. Paying your bills on time and in full will help.
• Adjust your spending habits and save more money to make larger debt payments.
• Find ways to increase your earnings.

Next Steps

Once you’ve calculated your DTI ratio and understood where you stand, then the next step is connecting with a mortgage banker.

DTI Ratio FAQ

Check out the answers to some frequently asked questions about DTI ratios.

Does my DTI ratio affect my credit score?

Your DTI ratio isn’t a factor that affects your credit score. However, your DTI ratio and credit score both are influenced by the amount of debt you have.

Are DTI ratios based on pretax income?

Yes. Your DTI ratio is calculated using your gross monthly income, which is the amount you earn before taxes are deducted.

Does my DTI ratio include utility bills?

No. Utilities like electricity, water, and gas aren’t part of your debt-to-income ratio calculation.

How do I know if I have too much debt?

Here are some signs that your debt could be getting out of hand:
– You’re spending more than you’re making.
– You don’t have emergency savings.
– Your DTI ratio is significantly higher than 36%.
– You get denied after requesting a new credit line or a higher credit limit.
– You can only afford to make minimum credit card payments.