DTI: Debt-to-Income Ratio Information

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%.
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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 gross 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, a DTI above 44%  makes it very hard to qualify for a mortgage.

Debt-to-Income Ratio Info graphic

dti: debt-to-income infograhpic

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 your dti, credit score, and loan-to-value are all strong.

your debt-to-income ratio tells you a lot about your financial health and your chances of qualifying for a mortgage loan. the best thing to do is to keep your debt under control and avoid taking on too much debt. to much debt can prevent you from qualifying for a mortgage and send your finances plummeting.

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17 Comments

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  • JK
    Feb, 2014
    Joe
    Deposit, NY
    Hi, I have a question in regards to child support. I read somewhere that if the child is over a certain age, the support would not be counted toward the DTI as the payments will cease. Can you elaborate on this? Thanks!
    1 Votes

    • BA
      Feb, 2014
      Bill
      First of all there are differences between loan programs and lenders. Also, there are differences between child support as income and child support as a liability (debt). If you are speaking about child support from the income side, then the lender would look to see if this is stable income. Fannie Mae, for example, requires documentation showing that the child support will be paid for another three years. On the other hand if you are paying child support, then Fannie Mae, would consider it a debt if the payment continues more than 10 months. I advise you to explain your situation and work closely with your potential lenders.
      0 Votes

  • DA
    Feb, 2013
    Don
    Waldorf, MD
    Sir, I currently have a home loan and was interested in getting second home loan. My question is, what debt goes into calculating the Debt to Income ratio. I would assume only bills that show up on credit reports? Or do bills like phone, cable ..etc that don't show up get added somehow to the ratio? Thanks, Don
    0 Votes

    • BA
      Feb, 2013
      Bill
      It is not only the bills that show on your credit report that make up your DTI. For instance, alimony or child support may not appear on your credit reports, but your monthly required payments for those categories would be included in your DTI. Your monthly expenses for phone, cable, food, car insurance, gasoline, etc. are not included.

      In your case, your DTI will be based on your monthly gross household income and the required principal, interest, property taxes on both the first home loan and the one you would apply for on the second, and your monthly required payments for any auto loans, student loans, credit card accounts, personal loan accounts, alimony or child support, and legal or tax assessments you have.
      0 Votes

  • NZ
    Apr, 2012
    Nando
    Dallas, TX
    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.
    0 Votes

    • BA
      Apr, 2012
      Bill
      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.
      0 Votes

  • VB
    Mar, 2012
    V
    Tracy, CA
    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.
    0 Votes

    • BA
      Mar, 2012
      Bill
      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?
      0 Votes

    • VB
      Mar, 2012
      V
      Tracy, CA
      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.
      0 Votes

    • BA
      Mar, 2012
      Bill
      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.
      0 Votes

  • KS
    Feb, 2012
    Kimberly
    Chicago, IL
    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.
    0 Votes

    • BA
      Feb, 2012
      Bill
      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.
      0 Votes

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