The Complete Guide to Debt-to-Income Ratio (DTI)

Most people know having good credit helps you qualify for a loan, but its lesser-known friend, debt-to-income ratio (DTI), is just as important. Your DTI is a percentage that shows how much of your income goes toward debt payments each month. A 50% DTI, for example, means that half of the money you make each month goes to paying debt.

Most lenders, whether you’re applying for a mortgage, personal loan, car loan, or something else, prefer a DTI of 36% or less to qualify for the best rates. However, depending on your lender and other factors, you can still get approved for some financing options with a higher DTI. Here’s everything you need to know about your DTI, how it works, and why it’s important.

Table of Contents

1. What is debt-to-income, and how does it work?
2. What info do I need to figure out my DTI?
3. What is a good debt-to-income ratio?
4. How to calculate DTI
5. How to lower your DTI

What is debt-to-income, and how does it work?

A debt-to-income ratio is a numeric value lenders use to determine whether to approve you for a loan. DTI is expressed as a percentage, which is calculated using your current monthly debt payments and your monthly income.

(Monthly debt payments / Gross monthly income) x 100 = DTI percentage

Lenders use your DTI percentage as a way to measure how financially stable you are.

Front-end vs. back-end DTI

You might hear about two different types of DTI calculations when working with lenders: front-end and back-end DTI. A front-end DTI refers to housing costs. This includes everything required to afford your home, including your mortgage costs, property taxes, insurance, and sometimes HOA fees.

According to the Federal Deposit Insurance Corporation (FDIC), home lenders prefer your costs for your home’s principal, interest, taxes, and insurance (PITI) to be no more than 25% to 28% of your gross income each month.

A back-end DTI is the one we’ll describe here. This refers to your total monthly expenses divided by your gross monthly income. Lenders for all types of financial products, not just mortgages, will consider your back-end DTI when reviewing your application.

What is included in a back-end DTI?

To calculate your back-end DTI, you’ll include all your monthly debt obligations, including minimum credit card payments. You can also include many different types of income, including alimony and child support.

How DTI affects your life

You can have an excellent credit score but still be denied a loan due to a high DTI because lenders prefer borrowers with room in their budgets to add on a monthly payment. 

If you have too much of your income going toward debt payments, lenders see a red flag, even if you have a perfect payment history and a good credit score.

Your DTI affects your ability to buy a home, finance a car, and qualify for other loans, like personal loans. That’s why it’s important to minimize your debt payments in relation to your income.

Not only could you qualify for loans with better terms, but having a lower percentage of your income tied up in debt payments can ease money stress.

What info do I need to figure out my DTI?

Figuring out your DTI starts with writing down your monthly debt payments. If you aren’t sure what those are, you can pull a free credit report from AnnualCreditReport. Other services, including CreditWise and Credit, Sesame give free access to reports. Your credit report will list your open loans and accounts. Here are the monthly payments you should include:

Expenses

• Mortgage or rent payment
• Car payment
• Student loan payment
• Personal loans
• Minimum credit card payments
• Any other active debt/loan listed on your credit report

If you have credit card debt, you can log onto each credit card to determine your minimum monthly payment. This amount will likely change as you pay down your credit card debt or make more purchases. However, you can still find your most recent minimum payment by looking at your last credit card statement.

Income

In addition to knowing your monthly expenses, you’ll also need to know your gross monthly income. You can find this information by looking at one of your paychecks and finding the amount of your income before taxes and expenses. Here is a list of all the income types you can include in a DTI payment:

• W2 employment income
• Business income
• Alimony
• Child support
• Social security income
• Pension income
• Rental income from investment properties
• Dividend investing income
• Tips and bonuses

You can keep an eye on your DTI ratio by using software or other aggregation tools that map your accounts into a secure single view. This is where a mortgage, credit cards, and other debt can be viewed in one place.

What is a good debt-to-income ratio?

Generally, lenders consider a good debt-to-income ratio to be below 36%, but the lower it is, the better. But your DTI is only one of the many factors lenders review when considering whether to approve you for a loan. 

Lenders also look at your credit score and your income history. If you have a 0% debt-to-income ratio, the benefit is that you don’t have any debt whatsoever. However, according to the National Foundation for Credit Counseling, a 0% DTI doesn’t necessarily mean you’re ready for a large loan, like a mortgage.

Your credit score shows how you handle debt, if you make your payments on time, the length of your credit history, and more. If your 0% DTI is because you’ve never had a loan, that might damage your credit score and, by extension, your ability to qualify for a loan. So after calculating your DTI, check your credit score too.

Examples of DTI requirements

Here are examples of DTI requirements for different types of loans. Keep in mind that most DTI requirements vary by lender. Some lenders will allow you to qualify for a loan with a higher DTI if you meet other requirements.

Loan type	DTI requirements
Personal loan	Varies by lender; Upstart (the best lender for thin credit) requires <45% to 50%
Conventional mortgage	Typically <36% – 50%; Discover, for example, requires <43%
FHA loan	Typically <43%; Better Mortgage allows up to 57%
USDA loan	Typically <41%
VA loan	Typically <41%
Home equity loan	Typically <43%; PenFed requires <40%
HELOC	Varies by lender; for example, Figure <50%, Aven <43%, Spring EQ <45%
Auto loan	Typically <36%; Carputty requires <50%
Student loans	No DTI requirement for federal student loans; typically 36% for private student loans
Student loan refinance	Typically <50%

How to calculate DTI

Calculating your DTI is straightforward using the formula we shared earlier: 

(Monthly debt payments / Gross monthly income) x 100 = DTI percentage

1. The first step is to add your monthly debt responsibilities. Again, include your mortgage (or rent), student loan payment, car payment, other loan payments, and credit card minimum payments. 
2. Next, look at your paycheck to determine your gross monthly income. Gross income is the amount of money you make before deductions like taxes, health insurance, or retirement account contributions. You can also include child support, alimony, and business income. 
3. Divide your total monthly debt payments by your gross monthly income. 
4. Multiply that answer by 100 to represent the number as a percentage. This is your DTI ratio. 

As we mentioned, many lenders prefer to see a DTI of 36% or less, although others might allow a DTI of up to 50%, depending on the type of loan. Below is an example of a DTI calculation. If you aren’t sure of your debt obligations or minimum payments, pulling a copy of your credit report can help ensure you include everything a lender will see.

Example DTI scenario and calculation

Sara wants to buy a house in the next few months. She has good credit because she pays her rent, student loan bills, and car payments on time. Her lender told her that to get approved for a mortgage, her DTI should be 36% or lower. Here are her numbers:

Expenses

• Rent: $1,550
• Car loan: $400
• Student loan: $425

Gross income

• $6,600

DTI calculation in 4 steps

1. Add expenses together ($1,550 + $400 + $425 = $2,375)
2. Determine gross income ($6,600)
3. Divide expenses by gross income ($2,325 / $6,600 = 0.35)
4. Multiply the answer by 100 to create a percentage (0.35 x 100 = 35%)

Summary

In this example, Sara’s DTI is 35%. That means a mortgage lender is more likely to approve her for a loan, especially with good credit and a stable job history. Lenders that offer home equity loans, HELOCs, personal loans, and other types of loans also check DTI as one of the many factors before approving a borrower for financing.

How to lower your DTI

If your DTI is higher than ideal, the best way to improve it is to pay down your debt strategically. Your debt payoff method will depend on whether you need to lower your DTI quickly or if you have several months to a year to do so. Remember, your DTI isn’t based on your total debt but on the number of outgoing payments in relation to your income. 

So, if you plan to buy a house next year, and you have 12 months to pay down debt to lower your DTI, use the debt snowball or the debt avalanche method. With the debt snowball, you pay off your debt from smallest to largest to build momentum. With the debt avalanche, you pay off your debt from the highest interest rate to the lowest to save on interest costs.

Lower your DTI quickly

If you need to lower your DTI quickly, pay off or refinance one of your highest monthly payments. Your mortgage or rent likely won’t change quickly, so look to the next highest payment, like your car loan or student loan. Determine whether or not you can pay off the debt quickly. If not, consider refinancing longer to lower your monthly payment.

To manage your DTI, create a budget. The important thing here is to review income and expenses, and identify areas where you can cut back on spending. Reduce debt by paying more than the minimum payments, avoid taking on new debt, and if needed, postpone large purchases until the budget is working well for you.

If your DTI needs further room, look for efficient ways to consolidate your debt. There are loan programs and options that allow you to consolidate multiple loans into a single—and, hopefully, lower-cost—payment!