What is your debt-to-income ratio and how do you calculate it?

Your debt-to-income ratio compares your total debt payments to the amount of money you bring in each month.

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Find out what your debt-to-income ratio is, how to calculate it, and how it affects your ability to get a loan. (Shutterstock)

Your debt-to-income (DTI) ratio compares your monthly debt payments against your monthly pre-tax income. When you apply for a loan or credit card, lenders typically look at your DTI ratio — along with other factors like your credit score and employment status — to determine how well you may be able to pay them back.

Here’s how to calculate your debt-to-income ratio and how it might affect your ability to get approved for a loan.

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What is your debt-to-income ratio?

Your debt-to-income ratio, which is typically expressed as a percentage, shows how much of your total monthly income goes toward your monthly debt payments. This debt may include your mortgage, credit card bills, car loans, student loans, and personal loans.

When a lender is reviewing your loan or credit application, it’ll consider your DTI ratio as an indicator of how likely you are to repay a loan. A high DTI ratio could indicate a greater risk because you’re already using a lot of your income to pay other debt. 

A lender may assume this means you might not be able to comfortably afford to take on a new debt payment. The lower your DTI ratio, the more attractive you are to a lender and the more likely you are to get approved. 


How do you calculate your debt-to-income ratio?

To calculate your DTI ratio, follow these steps:

  1. Add up your total monthly debt payments. These should include any payments that are being reported to the credit bureaus, such as mortgage or rent, car loans, student loans, mortgages, and credit cards.
  2. Find your monthly gross income. This is your monthly take-home pay before taxes, health insurance, and other deductions are withheld. Your pay stub will tell you this number.
  3. Calculate your DTI ratio. Divide your total monthly debt payments by your monthly gross income. Then, multiply your answer by 100 to get your DTI ratio.

For example, let’s say your monthly income before taxes is $6,000 and these are your debt payments every month:

  • Mortgage: $1,100
  • Car payment: $400
  • Student loans: $1,500
  • Credit cards: $500

Your total monthly debt payments add up to $3,500. In this case, your DTI ratio would be 58% ($3,500/$6,000 x 100). 

Here’s another example:

Your monthly income before taxes and deductions is $8,000 and your debt payments each month include:

  • Rent: $900
  • Credit cards: $700
  • Car payment: $400

Since your monthly debt payments add up to $2,000, your DTI ratio would be 25% ($2,000/$8,000 x 100). 

Your DTI ratio in the second scenario is much lower than the one in the first example, meaning you’re more likely to get approved for a loan.

Keep in mind that your DTI ratio doesn’t factor in your monthly bills, insurance, healthcare, and any other expenses you might have. That’s why you should also consider these when deciding if you can afford a monthly payment for a personal loan or a mortgage.

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What is a front-end ratio?

Also known as your housing ratio or mortgage-to-income ratio, your front-end ratio is how much you pay toward your housing expenses each month compared to your monthly income. This might include your mortgage payment, mortgage insurance, and property taxes. To find your front-end ratio, divide your total housing costs by your gross monthly income.

What is a back-end ratio?

Since your back-end ratio takes all your debts into account, it’s often referred to as your overall DTI ratio. To calculate it, add up all your monthly debt payments, including your housing costs and other payments, like car loan payments and credit card payments. Then, divide this number by your gross monthly income. Lenders use your back-end ratio more often because it gives them a more complete picture of your debt load.

How to lower your DTI ratio

You can reduce your DTI ratio and increase your chances of getting approved for a loan with favorable rates and terms in a number of ways. Here are several suggestions:

  • Increase your income. If it’s been a while since you received a raise at your full-time job, consider asking your boss for a raise to boost your income and in turn, lower your DTI ratio. You can also take on a part-time job or a side hustle, like delivering meals or babysitting.
  • Create a budget and keep tabs on spending. A budget can make it easier for you to pay attention to your spending and keep your DTI ratio in check. By being mindful of how you spend your money, you might be able to find ways to lower or even eliminate some expenses. For example, if you notice you dine out often, you can cook your meals at home instead. Or if you have a gym membership you never use, you may cancel it. The less you spend, the more you’ll have to put toward your debt.
  • Consider the debt snowball method. The debt snowball method is when you pay your smallest debt first and then move on to the next-smallest debt until all your debts are repaid. This strategy will give you the motivation to continue your debt payoff journey as you see your balances disappear.
  • Use the debt avalanche strategy. With the debt avalanche strategy, you prioritize your highest interest debts. By knocking off debts with the highest interest rates first, you’ll save more money in interest in the long run. If you have many high-interest debts, this strategy can add up to hundreds or even thousands of dollars in savings. But it may not keep you motivated as much as the debt snowball method since it can take longer to pay off a single debt.
  • Refinance your debt. Refinancing allows you to pay off one or more existing debts — like credit cards — with a new loan, ideally with a lower interest rate or better terms. You’ll have one easy-to-manage payment instead of several. If you refinance your debt and lock in a better rate, you may free up your cash flow and pay down debt sooner, improving your DTI ratio.
  • Pay more than the minimum. While it may be tempting to only make the minimum payments on your credit cards and loans, paying more on these debts whenever you can is a smart move. You’ll be able to lower your debt and DTI faster and save on interest in the process.
  • Don’t take on more debt. Do your best to avoid opening new credit cards or taking out new loans unless you absolutely have to. If you need to make a large purchase, you may want to postpone it until you have enough cash on hand. Adding to your debt payments each month will increase your DTI ratio.

It’s a good idea to recalculate your DTI ratio every month to find out whether you’re making progress. By watching the percentage go down slowly but surely, you’ll be motivated to keep your debt at manageable levels. 


What’s an ideal debt-to-income ratio?

While every lender has its own requirements, most prefer a lower DTI ratio. Ideally, your DTI ratio should be no higher than 36% overall. If your DTI doesn’t meet this criteria, lenders might still approve you. It all depends on your credit score, savings, and assets. But in most cases, you need a DTI ratio below 43% to get a loan.

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