How to calculate your debt-to-income ratio (DTI)

What is a debt-to-income (DTI) ratio?

Debt-to-income ratio, often called DTI for short, is a financial metric that compares how much you earn to how much you owe towards debts each month. It’s primarily used as a tool by lenders and credit card companies to assess risk. If you already have a high ratio of debt, they may be hesitant to offer new credit, or they can even outright deny you.  

 You can also use debt-to-income ratio as an individual to help in your financial planning and assess whether you are financially comfortable taking on new payments. This is often useful when looking to buy a home. In this article, we’ll cover important details of DTI and how it can be used.  

Why is debt-to-income ratio important?

Debt-to-income ratio is important because it can disqualify you from getting a new credit card or qualifying for a car loan or mortgage. It’s an important metric of financial health and keeping it in a manageable place will help you achieve more financial freedom. If more than 50% of your paycheck every month is going towards debt payments, there might not be much left over to take care of other essentials and save for the future.  

What is a good debt-to-income ratio?

While every lender will look at DTI slightly differently, and it isn’t the only thing taken into consideration, these are general guidelines for debt-to-income ratio: 

 Under 35% — GOOD. Most lenders will see this as a healthy balance. 
36%-41% — OKAY. While still usually acceptable, this may trigger lenders to look at other eligibility factors. 
42%-49% — CONCERNING. Some lenders may be hesitant to offer new credit. 
50% or higher — NEEDS IMPROVEMENT. Lenders may be unwilling to offer new credit.

How to calculate your debt-to-income ratio

Calculating your DTI is pretty easy, but some math is involved. All you should need is the calculator app on your phone and access to your bank statements and bills. Take these four steps to find your debt-to-income ratio:   

Step 1: Add up all monthly debt payments. 
Take a look at the past few months of your bills and bank statements. Add up all the debt payments you have in a single month. It should be fairly close from month to month, unless your payment schedule is different. See below for what you should include or exclude in this calculation.  

Step 2: Determine your gross monthly income. 
There are two ways to look at income. Gross income is what you make on paper before taxes, Social Security, any 401(k) contributions, or other deductions are taken out of it. Net income is what actually goes into your bank account each month after that. Both are useful, but for the purposes of debt-to-income ratio, we want your total pay or gross income. You can find this on your physical or digital pay stub. Don’t use the amount deposited into your bank accounts. 

Step 3: Divide monthly debt by gross monthly income.
In your calculator app, type in your monthly debt obligation number, hit ÷ (division symbol), and type your gross monthly income. The number you see should be zero point something, e.g., 0.31.   

Step 4: Multiply by 100 to show as a percentage. 
Next, multiply that number by 100 to see it expressed as a percentage. Following our example, 0.31 will end up as 31%.

Debts to include in DTI calculation

When you are going through your monthly payments, it may get confusing on what you should include. For the most part, it’s only money you have borrowed from lenders and are paying back. Rent is one exception. Here’s what you should include: 

• Housing costs including rent or mortgage payments and property taxes 
• Auto loans 
• Student loans 
• Personal or installment loans 
• Minimum monthly due on credit cards 
• Child support or alimony 
• Any other recurring debt 

Add up all the payments you make each month towards these debts. That is your total monthly debt burden. You’ll use this number in your calculation (see below). 

Debts to exclude from DTI calculation 

Other monthly expenses that you should not include in your DTI calculation: 

• Utilities 
• Groceries 
• Insurance payments 
• Childcare 

Debt-to-income ratio example

Let’s give an example of how to calculate your debt-to-income ratio. You can use this framework to help you organize and calculate your own DTI: 

Step 1: 
Rent: $2,000
Student loans: $250
Car payment: $150
Credit card minimum payment: $80 
Total monthly debts: $2,480 

Step 2: 
Gross monthly Income: $6,500 

Step 3: 
2,480 / 6,500 = 0.382 

Step 4: 
0.381 x 100 = 38.2% 

In this example, your debt-to-income ratio would be 38.2%. That’s an okay DTI but getting close to concerning. You will likely qualify for new credit or a loan, but taking on new debt will increase this percentage, and you may find yourself struggling to make debt payments and live comfortably in the future. 

Front-end vs. back-end DTI ratio 

There’s one additional wrinkle with debt-to-income ratios. Lenders will often use two different calculations in order to get a more complete picture of your finances. Front-end ratio only includes housing expenses. This is often used when deciding whether you can afford a mortgage. Lenders typically want this number under 28%. Back-end debt-to-income ratio includes all debts, like we’ve been using throughout this article, and is likely more useful to you.    

Understanding your debt-to-income ratio

Debt-to-income ratio is just one tool to define your overall financial picture. You can still be financially healthy if you have a higher DTI, but it can be a red flag that you are taking on too much debt. If your DTI ratio needs improvement, it is probably time to start watching your spending and create a budget. Learning to budget can help you reduce debt over time and improve your financial situation. The 50 | 30 | 20 budget rule is one of the easiest and most effective to follow. 

Tips for improving your debt-to-income ratio

There are really only two ways to improve your DTI ratio: increase your income or lower your existing debts. Both can be tricky. You can increase your income by changing jobs, seeking a raise, or taking on a side hustle. There are a few ways you can reduce debt. The most obvious is paying down existing debt and credit cards, particularly ones with higher interest rates. You can also look into consolidating debt or refinancing. Finally, adding a co-signer that has a good credit score and lower DTI may help you qualify for a loan you wouldn’t otherwise. Another big contributor to your debt-to-income ratio can be student loans. Here are some tips on how to pay off your student loans. If you need debt counseling or help improving your DTI ratio, a qualified financial professional may be able to help.  

Debt-to-income ratio FAQs

What is a healthy debt-to-income ratio?
Below 35% is generally considered ideal by lenders. However, you may still qualify for loans or a mortgage with a higher DTI. Over 50% is where things begin to get more problematic. 

What is a bad debt-to-income ratio?
Lenders may start to be concerned with offering you credit if your DTI is over 42%. If your DTI is over 50%, you may find it difficult to take out a loan or qualify for a credit card.   

How can I fix my debt-to-income ratio? 
Increasing your income or lowering your existing debt are the only ways to improve your DTI. Setting a budget to pay down existing debt can help. Take a look at the 50 | 30 | 20 budget rule. 

How do I check my debt-to-income ratio?
You will need to do the calculation yourself. Add up all of your debt payments each month, including mortgage, loans, and minimum credit card payments. Then divide by your gross monthly income.  

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