How to Calculate Debt-to-Income Ratio (DTI)

Mortgage lenders use debt-to-income ratios to assess their borrowers’ creditworthiness. A “good” DTI is generally agreed to be below 43%, though some lenders may want yours to fall below 36%. A high DTI can be a red flag that signals that you’ll struggle to manage additional household debt, which can elevate your risk in the eyes of lenders. 

Your DTI is simply the amount of monthly debt you owe divided by your total monthly income. Of course, properly calculating your debt-to-income ratio means first determining those two numbers. 

First, you can use your pay stubs or direct deposits to determine your gross (pre-tax) monthly income. If you’re unsure, you can simply use the adjusted gross income from your last tax return and divide that number by 12. 

Next, you’ll add up all your total monthly debt payments. These include things like: 

• Auto loans 
• Student loans 
• Personal loans 
• Credit cards 

Adding all your monthly loan payments together will get you the total recurring debt. Once you have both numbers, you’ll calculate your DTI by dividing your total monthly debt by your gross income. 

For instance, if your total monthly debts add up to $2,100, and your monthly income is $5,000, your debt-to-income ratio will be 42% ($2,100 / $5,000). 

Take advantage of a free DTI calculator. Using these calculators involves the same process outlined above. You’ll enter your income and recurring monthly debts into the calculator, which will then provide your DTI as a percentage. 

One advantage of electronically calculating your DTI is that you can see how paying down certain debts (such as your credit cards) will affect it. That can prove valuable in strategically paying down your debts prior to applying for a home or auto loan. 

Lenders will often take a deeper dive into your debt-to-income ratio by splitting it up into two key components known as your front-end ratio and back-end ratio. 

Here’s how each one works and how it impacts your creditworthiness: 

On its own, your debt-to-income ratio will not directly impact your credit score, in part because consumer credit bureaus do not measure your monthly income. However, the factors that contribute to your DTI may impact your credit. 

For example, your credit score is partly influenced by your credit utilization ratio, which is the percentage of your credit limit that you currently use. Therefore, high monthly credit card payments can raise your DTI and show that you’re using a larger portion of your credit limit, which can lower your credit score. Conversely, paying down your credit card debts can lower both your DTI as well as improve your credit score. 

By now, you have all the resources you need to calculate your DTI. But what can you do if your DTI is a little higher than you anticipated? 

First, don’t panic: Having a high debt-to-income ratio won’t necessarily prohibit you from securing a home or auto loan. But you may find yourself strapped with higher interest rates than if your DTI was more favorable.  

Thankfully, there are some basic steps you can take to lower your monthly debts and raise your monthly income, improving your deb-to-income ratio in the long run: 

Understanding your debt-to-income ratio will better equip you for the mortgage process. If you have additional questions about the optimal DTI for your mortgage program, talk to a real estate professional. Learning to manage your debts will improve your chances of securing favorable loan terms, which can save you thousands over the course of your loan.