# DTI: Debt-to-Income Ratio Information

Daniel Cohen
UpdatedFeb 18, 2015
• 3 min read
Key Takeaways:
• 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 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 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.

JJoe, Feb, 2014
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!
BBill, Feb, 2014
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.
DDon, Feb, 2013
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
BBill, Feb, 2013
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.
NNando, Apr, 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.
BBill, Apr, 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.