Your debt-to-income (DTI) ratio is a crucial component of your overall financial health, in addition to your credit score. You can decide whether applying for credit is the right move for you and how comfortable you are with your current debt by calculating your DTI.
Lenders assess your DTI when you apply for credit in order to assess the risk of you making another payment. Use the information below to calculate your own debt-to-income ratio and understand what it may mean to lenders.
Your debt-to-income ratio (DTI) is an important factor that lenders consider when you apply for a loan. It’s a measure of how much of your gross monthly income goes towards paying off your debt. A lower DTI indicates that you have more money available to make your monthly payments, which makes you a less risky borrower
What is included in a DTI calculation?
- Monthly debt payments: This includes your mortgage or rent payment, car payments, student loan payments, credit card minimum payments, and any other recurring debt payments.
- Gross monthly income: This is your total income before taxes and other deductions. It includes your wages, salary, tips, bonuses, pension, social security, child support, alimony, and any other income you receive.
What is not included in a DTI calculation?
- Non-recurring expenses: This includes expenses that you don’t pay every month, such as groceries, utilities, gas, and entertainment.
- Taxes: Your DTI is calculated before taxes are taken out of your income.
- One-time payments: This includes things like down payments on a house or car, or large medical bills.
How is a DTI calculated?
To calculate your DTI, simply add up your monthly debt payments and divide that number by your gross monthly income. The result will be a percentage. For example, if your monthly debt payments are $1,000 and your gross monthly income is $5,000, your DTI would be 20%.
What is a good DTI?
A good DTI is typically considered to be 36% or lower. This means that no more than 36% of your gross monthly income goes towards paying off your debt. However, some lenders may accept a higher DTI, depending on the loan product and your creditworthiness.
Why is DTI important?
Your DTI is important because it helps lenders assess your ability to repay a loan. If your DTI is too high, it means that you have a lot of debt and may not have enough money to make your monthly payments. This could make it more difficult to get approved for a loan, or you may have to pay a higher interest rate.
How can I improve my DTI?
There are a few things you can do to improve your DTI:
- Pay down your debt: This is the most effective way to lower your DTI. Focus on paying off your high-interest debts first.
- Increase your income: This will give you more money to put towards your debt payments.
- Get a cosigner: If you have a low credit score, you may be able to get a loan with a cosigner who has good credit.
Here are some additional things to keep in mind about DTI:
- Your DTI may vary depending on the lender.
- Your DTI can change over time as your income and debt change.
- It’s important to monitor your DTI and make sure it stays within a healthy range.
If you are considering applying for a loan, it’s important to calculate your DTI and understand what it means to lenders. This will help you determine whether you are likely to be approved for a loan and what interest rate you may qualify for.
Here are some additional resources that you may find helpful:
- Wells Fargo: Common Questions About Debt-to-Income Ratios
- Wells Fargo: Calculate Your Debt-to-Income Ratio
Explore It Your Way:
The debt-to-income ratio is a tool used by lenders to assess your ability to manage monthly payments and pay back borrowed funds.
What monthly payments are included in my debt-to-income ratio?These are some examples of payments
- Monthly mortgage payments (or rent)
- Monthly expense for real estate taxes
- Monthly expense for home owner’s insurance
- Monthly car payments
- Monthly student loan payments
- Minimum monthly credit card payments
- Monthly time share payments
- Monthly personal loan payments
- Monthly child support payment
- Monthly alimony payment
- Any Co-Signed Loan monthly payments
Check with your lender if you are not sure about the items considered when calculating your debt-to-income ratio.
How to Calculate Your Debt to Income Ratios (DTI) First Time Home Buyer Know this!
FAQ
What is not included in debt-to-income ratio?
What bills are considered in debt-to-income ratio?
Do credit cards count in debt-to-income ratio?
What is a good debt-to-income ratio?
What is a debt-to-income ratio?
The debt-to-income (DTI) ratio is a personal finance measure that compares an individual’s monthly debt payment to their monthly gross income. Your gross income is your pay before taxes and other deductions are taken out. The debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments.
How do you calculate debt to income ratio?
Now divide your total recurring monthly debt by your gross monthly income. The quotient will be a decimal; multiply by 100 to express your debt-to-income ratio as a percentage. Your debt-to-income ratio, along with your credit score, is one of the most important factors lenders consider when you apply for a loan. Can You Afford That Big Purchase?
Do I need to know my debt-to-income ratio?
You need to know this number if you’re going for a mortgage. Your debt-to-income ratio (DTI) is a personal finance measure that compares the amount of debt you have to your gross income. You can calculate your debt-to-income ratio by dividing your total recurring monthly debt by your gross monthly income
What is a low debt-to-income ratio?
The debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments and is used by lenders to determine your borrowing risk. A low debt-to-income (DTI) ratio demonstrates a good balance between debt and income.