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DTI: Debt-to-Income Ratio Information

Empty pockets? Maybe it is time to get a loan.
HIGHLIGHTS
  • Debt to income (DTI) measures the percent of your income that is paid toward debt.
  • Don't borrow more than you can comfortable repay.
  • When you apply for a mortgage, measure combined debt to income and try to keep it below 35%.

Understanding your Debt-to-Income Ratio is an Important Part of Knowing your Financial Options.

You need to learn about your debt-to-income ratio (DTI), if you want to monitor your overall financial situation.

DTI is a formula that compares certain debts you have to your gross income . To calculate your debt-to-income ratio, take your monthly debt payments (for you house, credit cards, and vehicle, student loan, and alimony or child-support) and divide it by your monthly take-home income. If you have a debt that you will pay off in 6 months by making your normal payment, it may not be counted in your DTI .

Items such as monthly food expenditures, utility bills, and entertainment expenses are not included in your debt-to-income ratio. Though you clearly have to budget money to pay for these expenses, they are not used by lenders when calculating your DTI.

Debt-to-Income Calculation Example

If you make $4,000/month,before taxes, this is your gross monthly income.  Let's assume that you  have a car payment of $400/month and a house payment of $1,200/month, and a monthly minimum payment on your credit cards of $250/month. The total of these monthly expenses is $1,850.

To establish your debt-to-income ratio, divide your monthly debt payment by your monthly income. The end result is your debt-to-income ratio.

  • Monthly income: $4,000
  • Monthly debt payment: $1,850
  • Debt-to-income ratio: $1,850/$4,000 = 46%

What Does Your DTI Mean?

Now that you know your debt-to-income ratio, it’s time to discover what your ratio is telling you. If you have a ratio of 30% or less, it means you have a great debt-to-income ratio, meaning your income is significantly more than what you owe. However, if you have a debt-to-income ratio of 44% or higher, it means you are taking on too much debt in relation to your income, in the eyes of mortgage lenders. It used to be the case, before the sub-prime loan market collapsed, that lenders would offer you a loan if your DTI was up to 55%, provided you met the other lending requirements. Today, anything above 44%  makes it hard to qualify for a mortgage.

Debt-to-Income Ratio Info graphic

Debt-to-Income Ratio and Lenders

Lenders calculate and analyze your debt-to-income ratio to determine the size mortgage you can afford. In fact, your DTI,  your loan-to-value (LTV), and your credit scores are the most important numbers that lenders look at when deciding whether you qualify for a loan or in quoting you a mortgage amount and interest rate.

If are thinking to yourself, should I refinance my  home and want to know if you will get the best rates from a refinance lender, make sure that you DTI, credit and loan to value are all strong.

So as you can see, your debt-to-income ratio can tell you a lot about your debt and your chances of qualifying for a mortgage loan. So in the end, the best thing to do is to keep your debt under control and not to take on too much debt. It could hinder your ability to qualify for a mortgage and send your finances plummeting.

Comments (12)


Nando Z.
Dallas, TX  |  April 07, 2012
Is it possible for a debt to income ratio being too low? I am the type of person that pays everything in cash and have never had a credit card or revolving credit with any company. I would classify myself in the "no credit" group since it is not bad, just nothing is reported. I am 28 with monthly gross income of $4500.
Bills.com
April 07, 2012
No, your DTI cannot be too low. Separately, however, you need a credit score of a certain level, in order to get a loan. If you always pay cash and never establish credit accounts, you won't have the score necessary to qualify. Apply for a credit card, use it, and pay the balance in full each month. You need to show that you can use credit responsibly, so you can the best rates available when you want to finance a car or home purchase. If you get turned down when you apply for a credit card, due to your lack of credit history, apply for a secured credit card.
V B.
Tracy, CA  |  March 21, 2012
Hi Bill, I am interested in a house for $470k and am trying to qualify by myself on a loan of $417k because my husband has bad credit. I have $53,000 down and my debt to income ratio is 42.2% and my Credit Score is 770. I am nervous because my parents gifted me $8800 to pay off my car loan and I co-signed a loan for my husband and his parents gifted him $15k to pay off his loan. My loan officer is going to do a rapid rescore to show 0 balances on both loans. The problem is my last three bank statements show the vehicle loan on there. Also, in October 2011, my husband gave me $38k to put in our savings account for it to "season". What do you think my chances are of getting this loan approved? Thank you for your time.
Bills.com
March 21, 2012
I am a bit unclear on your present DTI. Is the 42.2% before or after paying off the two loans you mentioned? If it's before, what is your DTI at this moment? If it is 42.2% as of this moment, then my guess is the underwriter will raise an eyebrow at that number.

Can you show a consistent employment history over the last two years?

Is this an FHA-conformant loan?
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V B.
Tracy, CA  |  March 21, 2012
Hi Bill, my DTI is 42.2% after paying off the debt. I have been with the same employer for over ten years. It is a non FHA Loan. Thanks.
Bills.com
March 21, 2012
Your DTI may be an issue. I am not suggesting your application is doomed, but if the underwriter rejects it my guess it will be because of the DTI.
Kimberly S.
Chicago, IL  |  February 21, 2012
I'd like to know how income is provided to the credit bureaus. My income is HIGH but I'm always told I have a high/bad DTI. Is income reported by what's on my tax returns? If that's the case, does it help to begin showing more income? I have my own business and deduct / write off / or otherwise report very little income, but if reporting more $$$ is the best way to improve my credit score, I'm happy to report more income.
Bills.com
February 22, 2012
You ask a great question, Kimberly.

In the past, credit issuers used to reply on self-reported income figures that an applicant for credit would enter on a credit application. In response to the collapse in the credit market and the spike in accounts on which customers defaulted, the rules and laws were changed.

In 2010, the Federal Reserve Board issued rules to implement the Credit Card Act of 2010. The rules allow for "...statistically sound models that reasonably estimate a consumer’s income or assets."

In response to this, Experian introduced Income InsightSM, which is used to assess an individual's ability to pay. The Fed had considered requiring people to disclose income when applying for credit. Instead, the credit bureaus' estimations of customers' income is being used.

It is not clear from your question what kind of credit you are applying for, when you are told that your DTI is too high. If it is a home loan, then it would most assuredly help your ability to qualify if you were showing a higher income on your tax returns. Speak with your accountant. You need to delicately balance not paying more in taxes than you are legally required to pay against the potential benefit for getting approved for credit and loans by showing a higher income.
James G.
Pickerington, OH  |  December 02, 2010
The debt to income ratio is a poor criterion to use for granting a loan. I was refused a pre-approval letter of credit for $100,000, with 25% down because of my high debt to income ratio. My FICO 2 score was 840 and FICO classic 98 score was 815. I had liquid assets (stocks, bonds, annuities) to cover the value of the credit request many times over. After being turned down by PNC bank, I paid cash for the property I wanted. Go figure. One size does not fit all!
Bills.com
January 19, 2011
James, you're 100% right that there is no 'one-size-fits-all' system. Right now, lenders have tightened their lending requirements, in response to the mortgage crisis of the past few years. It used to be the case that strength in one area could compensate for weakness in another area. In the past, if you had excellent credit and a low loan-to-value, you would be granted slack regarding your DTI. Nowadays, a borrower needs to meet the lender requirements in all areas; lenders are unlikely to look at compensating factors. I agree that this can leave people like you, who should be granted a loan, out in the cold.
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Jim E.
Eureka, MT  |  August 30, 2011
Think about this...Obama wants to make low rate loans to those with bad credit. Perhaps it would make more sense to make sure guys like James can get the loan they deserve.
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Jackie E.
White Bear Twsp, MN  |  March 21, 2012
We own two homes free and clear, 22 acres, and have a lower mortgage than value for two properties. We have a credit rating of 724, never missed a payment in 39 years of marriage, while raising seven kids, having a bout with cancer and subsequent job loss. We make good money. We tried to refinance to a lower rate on our home for $60,000 less than it is worth and we are having a problem with debt to income ratio. I think the banks are going too far. Part of the issue with us is it would be nuts to sell our paid for lake home and rental at what they are not worth today. The rental makes our house payment but that payment is still included in our debt and the icing on the cake is that all of the taxes we pay for our property is included in our debt-in the lenders words, "we don't really own them because we have to pay taxes each year" so who owns them the government? Times have changed. It is no longer a positive to buy something and take pride in paying it off, nor is is a positive to own property because now the government does, yet, people who skew up, wreak their credit, take no responsibility for themselves are having their mortgages redone and/or forgiven. Get with it Oboma program, next time give the money to us not the banks! PS It is amazing that the property we own was an "asset" when we applied for college loans for our kids---in fact paying taxes on them never even came up as an expense!!!
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