When applying for a loan, such as a mortgage or car loan, lenders will typically ask for your debt-to-income ratio (DTI). DTI is a measure of how much of your monthly income is used to pay off your debts. Lenders use DTI to assess your ability to repay a loan.
In this article, we'll explain how to calculate your DTI and what it means for your credit. We'll also provide tips on how to improve your DTI if it's too high.
Ready to learn more? Let's get started!
How to Calculate Debt to Income Ratio
Follow these steps to calculate your DTI:
- List all your monthly debts
- Add up your total monthly debt payments
- Divide your total monthly debt payments by your gross monthly income
- Multiply by 100 to get your DTI percentage
For example, if your total monthly debt payments are $1,000 and your gross monthly income is $5,000, your DTI would be 20% ($1,000 / $5,000 * 100 = 20%).
List all your monthly debts
The first step to calculating your DTI is to list all of your monthly debts. This includes any payments you make on a regular basis, such as:
- Rent or mortgage payments: This is typically your largest monthly debt. Make sure to include any HOA fees or property taxes in your calculation.
- Car payments: If you have a car loan, include the monthly payment here. Also include any other car-related expenses, such as insurance and gas.
- Student loan payments: If you have student loans, include the monthly payment here. If you have multiple student loans, add up all of the payments to get your total monthly student loan payment.
- Credit card payments: Add up the minimum monthly payments for all of your credit cards. If you carry a balance on your credit cards, you may also want to include the interest you pay each month.
Once you have listed all of your monthly debts, add up the total amount of your payments. This is your total monthly debt.
Add up your total monthly debt payments
Once you have listed all of your monthly debts, it's time to add up the total amount of your payments. This is your total monthly debt.
To do this, simply add up the amounts of all of your monthly debt payments. For example, if your rent or mortgage payment is $1,000, your car payment is $200, and your student loan payment is $300, your total monthly debt would be $1,500.
If you have multiple debts with different payment due dates, you can use a budgeting app or spreadsheet to track your payments and calculate your total monthly debt.
Once you know your total monthly debt, you can move on to the next step of calculating your DTI.
Tip: If you have any debts that are in default or forbearance, you should still include them in your total monthly debt calculation. This is because these debts are still considered to be liabilities, even if you are not currently making payments on them.
Divide your total monthly debt payments by your gross monthly income
Once you know your total monthly debt payments, you need to divide this number by your gross monthly income.
Gross monthly income is your income before taxes or other deductions are taken out. This includes your salary, wages, tips, bonuses, and any other forms of income you receive on a regular basis.
To calculate your DTI, simply divide your total monthly debt payments by your gross monthly income. For example, if your total monthly debt payments are $1,500 and your gross monthly income is $5,000, your DTI would be 30% ($1,500 / $5,000 = 0.30 or 30%).
Your DTI percentage will be a number between 0 and 100. The lower your DTI, the better. A lower DTI means that you have more money left over each month after paying your debts.
Tip: You can use a DTI calculator to make this calculation easier. There are many DTI calculators available online, or you can use the one provided by the Consumer Financial Protection Bureau (CFPB).
Multiply by 100 to get your DTI percentage
Once you have divided your total monthly debt payments by your gross monthly income, you need to multiply this number by 100 to get your DTI percentage.
- Why multiply by 100?
Multiplying by 100 converts the decimal you get from the division step into a percentage. This makes it easier to understand and compare your DTI to other borrowers.
- Example:
If your total monthly debt payments are $1,500 and your gross monthly income is $5,000, your DTI would be 30% ($1,500 / $5,000 = 0.30 or 30%).
- What does your DTI percentage mean?
Lenders use your DTI percentage to assess your ability to repay a loan. A lower DTI percentage means that you have more money left over each month after paying your debts, which makes you a less risky borrower.
- General DTI guidelines:
Most lenders consider a DTI of 36% or below to be acceptable. However, some lenders may have stricter DTI requirements, especially for certain types of loans. For example, FHA loans typically have a DTI limit of 43%.
Tip: If your DTI is too high, you may need to take steps to reduce your debt or increase your income before you can qualify for a loan.
FAQ
Have more questions about how to calculate your debt-to-income ratio? Here are some frequently asked questions:
Question 1: What debts should I include in my DTI calculation?
Answer 1: You should include all of your monthly debt payments, such as rent or mortgage payments, car payments, student loan payments, credit card payments, and any other debts that you have.
Question 2: What income should I use to calculate my DTI?
Answer 2: You should use your gross monthly income, which is your income before taxes or other deductions are taken out.
Question 3: How do I calculate my DTI percentage?
Answer 3: To calculate your DTI percentage, divide your total monthly debt payments by your gross monthly income and then multiply by 100.
Question 4: What is a good DTI percentage?
Answer 4: Most lenders consider a DTI of 36% or below to be acceptable. However, some lenders may have stricter DTI requirements, especially for certain types of loans.
Question 5: What if my DTI is too high?
Answer 5: If your DTI is too high, you may need to take steps to reduce your debt or increase your income before you can qualify for a loan.
Question 6: How can I improve my DTI?
Answer 6: There are a number of things you can do to improve your DTI, such as paying down debt, increasing your income, or getting a co-signer for a loan.
Closing Paragraph for FAQ
These are just a few of the most frequently asked questions about how to calculate your DTI. If you have any other questions, please consult with a lender or financial advisor.
Now that you know how to calculate your DTI, you can use this information to make informed decisions about your finances. If you are planning to apply for a loan, you can use your DTI to assess your chances of approval. You can also use your DTI to track your financial progress over time and make adjustments as needed.
Tips
Here are a few tips for calculating your debt-to-income ratio and using it to improve your financial situation:
Tip 1: Be accurate and complete when calculating your DTI. Make sure to include all of your monthly debt payments and your gross monthly income. If you are not sure about how to calculate your DTI, you can use a DTI calculator.
Tip 2: Compare your DTI to lender requirements. When you are applying for a loan, the lender will use your DTI to assess your ability to repay the loan. Most lenders consider a DTI of 36% or below to be acceptable. However, some lenders may have stricter DTI requirements, especially for certain types of loans.
Tip 3: Take steps to reduce your DTI if it is too high. If your DTI is too high, you may need to take steps to reduce your debt or increase your income. There are a number of ways to do this, such as paying down debt, getting a side hustle, or asking for a raise at work.
Tip 4: Monitor your DTI over time. Your DTI can change over time, especially if you take on new debt or your income changes. It is a good idea to monitor your DTI on a regular basis and make adjustments as needed.
Closing Paragraph for Tips
By following these tips, you can use your DTI to make informed decisions about your finances and improve your overall financial situation.
Calculating your debt-to-income ratio is a simple but important step in managing your finances. By understanding your DTI, you can assess your ability to repay debt, qualify for loans, and make informed decisions about your financial future.
Conclusion
Calculating your debt-to-income ratio (DTI) is a simple but important step in managing your finances. Your DTI can be used to assess your ability to repay debt, qualify for loans, and make informed decisions about your financial future.
To calculate your DTI, simply add up all of your monthly debt payments and divide this number by your gross monthly income. Then, multiply by 100 to get your DTI percentage.
A lower DTI is better, as it means that you have more money left over each month after paying your debts. This makes you a less risky borrower in the eyes of lenders.
If your DTI is too high, you may need to take steps to reduce your debt or increase your income. There are a number of ways to do this, such as paying down debt, getting a side hustle, or asking for a raise at work.
By following the tips in this article, you can use your DTI to make informed decisions about your finances and improve your overall financial situation.
Closing Message
Remember, your DTI is just one piece of the puzzle when it comes to managing your finances. You should also consider your savings, investments, and overall financial goals. By taking a holistic approach to your finances, you can set yourself up for success in the long run.