What is a debt-to-income ratio? Your debt-to-income ratio, commonly called DTI, compares your monthly debt payments with your gross monthly income. Lenders may use this percentage when evaluating whether you can reasonably manage additional debt.
Understanding your DTI can help you see how much of your income is already committed to debt payments. It can also be useful when preparing to apply for a mortgage, personal loan, auto loan, or other form of credit.
Below, we’ll explain how to calculate debt-to-income ratio, what may be considered a good or high DTI, which debts are typically included, and practical ways to lower your ratio.
What Is a Debt-to-Income Ratio?
A debt-to-income ratio is the percentage of your gross monthly income that goes toward required monthly debt payments.
For example, if your required monthly debt payments total $1,500 and your gross monthly income is $5,000, your DTI would be 30%.
A lower ratio generally means a smaller portion of your income is committed to existing debt.
How to Calculate Debt-to-Income Ratio
Learning how to calculate debt-to-income ratio requires two numbers:
- Your total required monthly debt payments
- Your gross monthly income before taxes and other deductions
Debt-to-Income Ratio Formula
The basic debt-to-income ratio formula is:
Total Monthly Debt Payments ÷ Gross Monthly Income × 100 = DTI
Debt-to-Income Ratio Example
Suppose you have these monthly debt payments:
- Auto loan: $400
- Credit card minimum payments: $200
- Personal loan: $250
- Student loan: $150
Your total monthly debt payments would be:
$400 + $200 + $250 + $150 = $1,000
If your gross monthly income is $4,000:
$1,000 ÷ $4,000 × 100 = 25%
Your debt-to-income ratio would therefore be 25%.
What Debts Are Included in Debt-to-Income Ratio?
DTI calculations generally focus on recurring required debt obligations rather than every expense in your monthly budget.
Depending on the lender and type of application, these may include:
- Mortgage or rent obligations when applicable
- Auto loan payments
- Personal loan payments
- Student loan payments
- Credit card minimum payments
- Child support or alimony obligations when applicable
- Other recurring debt payments
Specific underwriting calculations can vary by lender and loan type.
What Is a Good Debt-to-Income Ratio?
If you’re asking what is a good debt-to-income ratio, there isn’t one universal number that guarantees approval for every type of credit.
Generally, a lower DTI indicates that less of your monthly income is already committed to debt.
For mortgages, the Consumer Financial Protection Bureau notes that lenders consider DTI alongside other factors, and different loan programs can have different requirements.
Instead of treating one percentage as a universal cutoff, compare your DTI with the requirements of the specific lender and credit product you’re considering.
What Is a Bad Debt-to-Income Ratio?
What is a bad debt-to-income ratio? A higher DTI means a larger percentage of your gross monthly income is already being used for debt payments.
This can make it more difficult to qualify for additional credit because lenders may determine that taking on another payment could put additional pressure on your budget.
However, lenders consider more than DTI alone. Credit history, income, loan type, down payment, assets, and other factors may also affect a lending decision.
Why Does Debt-to-Income Ratio Matter?
Your DTI helps lenders evaluate your existing monthly financial obligations relative to your income.
A borrower earning $8,000 per month with $1,000 in debt payments is in a different position from someone earning $3,000 with the same $1,000 in payments.
DTI converts those obligations into a percentage that makes the relationship easier to evaluate.
Front-End vs. Back-End Debt-to-Income Ratio
When discussing mortgages, you may encounter two different DTI measurements.
Front-End DTI
Front-end DTI generally compares housing-related expenses with gross monthly income.
Back-End DTI
Back-end DTI generally includes housing expenses plus other recurring monthly debt obligations.
Which measurement matters depends on the lender and type of financing.
Does Rent Count Toward Debt-to-Income Ratio?
The answer can depend on the lender and type of credit application.
Mortgage underwriting, for example, may evaluate proposed housing expenses as part of DTI calculations. Other lenders may calculate obligations differently.
Always check how the specific lender defines monthly debt obligations.
Does Credit Card Debt Count Toward DTI?
Credit cards can be included in DTI calculations. Lenders commonly consider the required monthly payment rather than simply using your entire outstanding credit card balance.
This is different from credit utilization, which compares revolving credit balances with available revolving credit limits.
Learn more in our guide explaining what revolving credit is and how it works.
Debt-to-Income Ratio vs. Credit Utilization
DTI and credit utilization measure different things.
| Debt-to-Income Ratio | Credit Utilization |
|---|---|
| Compares monthly debt payments with income | Compares revolving balances with credit limits |
| Uses gross monthly income | Does not use income |
| Used by lenders when evaluating affordability | Can influence credit scores |
| Includes several types of recurring debt | Primarily relates to revolving credit |
Does Debt-to-Income Ratio Affect Your Credit Score?
Your income is generally not included in consumer credit reports, so DTI itself is not directly calculated as part of traditional credit scores.
However, the debts used to calculate your DTI can also appear on your credit reports and may affect your credit profile in other ways.
How to Lower Debt-to-Income Ratio
If you’re researching how to lower debt-to-income ratio, there are two basic ways to change the calculation: reduce monthly debt obligations or increase gross monthly income.
1. Pay Down Existing Debt
Reducing or eliminating a monthly debt payment can lower the total amount included in your DTI calculation.
2. Avoid Taking On Unnecessary New Debt
A new monthly payment can increase your DTI. Consider your existing obligations before adding another loan or credit account.
3. Pay Off Smaller Loans
If you can completely eliminate a smaller debt, its required monthly payment may no longer be part of your future DTI calculation.
If you currently have a personal loan, read our guide on how to pay off a personal loan faster.
4. Increase Income When Possible
An increase in documented gross income can reduce your DTI percentage if your debt obligations remain the same.
5. Recalculate Your DTI Regularly
As debts are repaid or income changes, calculate your DTI again to track your progress.
How Quickly Can You Improve Your DTI?
The timeline depends on your financial situation.
If you eliminate a monthly debt payment, your DTI calculation can change immediately based on the new numbers. Gradually paying down balances may take longer if the required monthly payments remain unchanged.
Frequently Asked Questions
What is a debt-to-income ratio in simple terms?
A debt-to-income ratio shows what percentage of your gross monthly income is used for required monthly debt payments.
How do I calculate my DTI?
Add your required monthly debt payments, divide that amount by your gross monthly income, and multiply the result by 100.
Is a lower debt-to-income ratio better?
Generally, a lower DTI means less of your monthly income is committed to debt, which can make it easier to manage additional financial obligations.
Does DTI include utilities?
Regular household expenses such as utilities are generally not treated the same as recurring debt payments in standard DTI calculations, although lender methodologies can vary.
Can I get a loan with a high DTI?
Possibly. Approval requirements vary considerably by lender and loan type. DTI is usually only one factor considered during underwriting.
Final Answer: What Is a Debt-to-Income Ratio?
So, what is a debt-to-income ratio? It is the percentage of your gross monthly income used to make required monthly debt payments.
Calculate it by dividing your total monthly debt payments by gross monthly income and multiplying by 100. Monitoring this number can help you understand your current debt burden and prepare before applying for additional credit.
For more financial education, explore the Cash In Minutes financial blog or learn about our personal loan options in Utah.
For additional information about DTI and mortgage borrowing, visit the Consumer Financial Protection Bureau.
