What Is a Debt-to-Income Ratio (DTI)?

Debt-to-income ratio, usually abbreviated as DTI, is a calculation commonly used by lenders to compare your total debts to your total income each month. By knowing your DTI, lenders can get a better sense of your ability to make regular monthly payments on the money you plan to borrow, while still being able to pay for your other recurring debts.

Continue reading to learn more about debt-to-income ratios, why they're important and how to start improving your DTI.

What is DTI?

DTI is the portion of your gross monthly income that goes toward paying debts. There are two types of debt-to-income ratios: a front-end and back-end. You may see both ratios shown together as a fraction, like 28/36, or individually as a single percentage, like 36%. When expressed as a fraction, the first number is the front-end ratio, and the second number is the back-end ratio.

Front-end DTI: The percentage of your income used to pay mortgage-related expenses, like your monthly mortgage payment, property taxes, insurance, and HOA fees.

Back-end DTI: The percentage of your income used to pay your mortgage-related expenses plus other recurring monthly debts, like credit card payments, subscriptions, student loan payments and auto loan payments.

Lenders usually look at your back-end ratio when you apply for a mortgage, because it gives an overall view of your total debts compared to your total earnings.

What is included in DTI?

Your debt-to-income ratio includes both monthly mortgage-related costs and debt-repayment costs, compared to your gross monthly income. Here is a breakdown of everything included:

Monthly mortgage costs

• Mortgage principal
• Interest payments
• Homeowners insurance premium
• Property taxes
• Mortgage insurance premium
• Homeowner’s association (HOA) dues

Minimum monthly debt payments

• Credit cards
• Car loans
• Student loans
• Personal loans
• Child support
• Alimony
• Vacation/rental property costs

Gross monthly income

Your gross monthly income is the total of everything you earn in a month before taxes or deductions. This includes:

• Base salary
• Hourly wages
• Additional commissions
• Bonuses
• Tips
• Investment earnings

If you have a single source of income from an employer, you can find your gross monthly income on your paystub. If you are co-signing on a loan with another person, you’ll need to look at your combined gross monthly income — which is the total of both your earnings.

What is not included in DTI?

Non-recurring and non-essential debts and expenses are not included in your debt-to-income ratio. This includes most everyday expenses and bills, like:

• Monthly home utility bills
• Car insurance premiums
• Cable bills
• Cell phone bills
• Health insurance costs
• Food or entertainment expenses

DTI ratios also only take into consideration the minimum amount you’re required to pay on each debt instead of the full balance owed, and the calculation doesn’t differentiate between the different types of debt you have and any additional interest you may owe.

For example, say you have a minimum credit card debt of $25 in addition to a penalty interest rate of 28.58% on a $300 balance. The DTI ratio would only account for the $25 minimum amount owed, even though you owe a total balance of $410.74. If you have additional recurring debts like a student loan or auto loan, those minimums would also be included but not any of the additional interest if owed.

How to calculate DTI

Your debt-to-income ratio is your total monthly debt payments divided by your gross monthly income. When your lender goes to calculate your DTI, they’ll most likely use an automated underwriting system (AUS) to crunch the numbers for them. It’s rare for a lender to do a manual DTI calculation. You can use a DTI calculator online to help you easily estimate your own debt-to-income ratio. Most calculators measure DTI by following these three primary steps:

Step 1: Add up your minimum, recurring monthly debt payments.

Step 2: Divide your total monthly debt payments by your gross monthly income.

Step 3: Multiply the result by 100 to get your DTI percentage.

Here’s a way to apply the steps above to a real-life example. Let’s say you have a mortgage payment of $1,200 per month, a minimum car payment of $200 and a minimum credit card payment of $100. That gives you a total monthly debt payment of $1,500. If you earn $4,500 per month, you can simply divide $1,500 by $4,500 for a DTI ratio of 0.33, or 33%.

What is a good DTI?

An ideal DTI ratio is 36% or less, because it shows your lender you’re not financially overstretched. With a DTI ratio of 36% or less, you typically have money left over each month to cover expenses and add to your savings. You can use a DTI calculator like the one pictured below to get an estimate of your current debt-to-income ratio.

Keep in mind. Even though 36% or less is considered a good DTI ratio, some lenders allow for a DTI as high as 50% (and others may even allow a higher debt-to-income ratio). When considering your own DTI, you want to make sure that you have enough income each month to repay any debts while still being able to live comfortably. Speak with a lender to discuss their DTI requirements and see if you qualify.

What debt-to-income ratio is needed for a mortgage?

For mortgages, the max debt-to-income ratio allowed in most cases is 50%. Some government-backed mortgages like FHA and USDA allow for a DTI as high as 55%, while others like VA loans may allow for an even higher DTI ratio. Remember, most lenders use your back-end ratio when qualifying you for a mortgage, which looks at the percentage of your income that goes toward paying monthly mortgage costs and recurring debts. Here’s a look at the different loan types and their DTI limits.

Does your DTI affect your credit score?

Your debt-to-income ratio doesn’t directly affect your credit score, but your overall credit utilization does. Your credit utilization ratio is another calculation used by lenders to gauge your ability to repay a loan. Also called a debt-to-limit ratio, credit utilization is the percentage of your total available credit that’s currently being utilized. In other words, it measures your debt balances as compared to the amount of existing credit you’ve been approved for by credit card companies. Typically, a good debt-to-limit ratio is 30% or less.

Here’s a quick example. If you have two credit cards with a combined total credit limit of $5,000, and you have a $1,000 balance, you’re using 20% of your available credit ($1,000 divided by $5,000). That would mean you have a good or acceptable debt-to-limit ratio.

Why is DTI important?

Your debt-to-income ratio shows lenders you’re able to make payments on-time and are likely to repay the money you borrow — improving your chances of being approved for a loan and getting a more favorable loan term. Sometimes, a lender will allow a higher DTI if you can show a good credit score and additional savings and assets that demonstrate your ability to repay the loan.

However, DTI is just one piece of the puzzle. When applying for a mortgage, it’s also helpful to figure out how much you can comfortably afford to spend on a home without overextending yourself and to start saving for a down payment as soon as possible.

How to lower your debt-to-income ratio

The two best ways to lower your DTI ratio are to pay off existing debt, especially high-interest credit card debt, and increase your earnings each month. According to a study from Experian, total consumer debt balances increased 5.4% from 2020 to 2021 and more than doubled the increase from the prior year. The primary factor helping consumers manage their debt is an increase in income, which continues to grow at an even greater rate since 2020.

Here are a few helpful tips to start lowering your debt and increasing your income:

• Track your spending, especially if using credit cards
• Limit unnecessary purchases
• Wait to make a large purchase
• Pay off debts as much as possible
• Avoid taking on new debt
• Pick up a second job
• Ask for a raise or bonus

If lowering your debts or increasing your income isn’t feasible, you can consider getting a co-signer on a loan who has a good source of income and low debt. By using a co-signer, lenders will look at your combined incomes instead of yours alone. A combined income may help lower your household debt-to-income ratio, improving your chances of pre-qualifying for a loan.