by Chelsea Springli 
In addition to your credit score, your debt-to-income (DTI) ratio is an important part of your overall financial health. Calculating your DTI may help you determine how comfortable you are with your current debt and also decide whether applying for credit is the right choice for you.
When you apply for credit, lenders evaluate your DTI to help determine the risk associated with you taking on another payment. Your DTI is a percentage calculated by dividing your monthly gross income with your monthly debt payments. Follow the steps below to discover your own DTI.
Total Your Monthly Bills
Take some time and total up the general, recurring bills you pay each month, like:
- Monthly rent or housing payment
- Monthly child support or other marital debt
- Auto loans, student loans, or other monthly loan payments
- Credit card minimum monthly payments
Remember, payments like groceries, gas, parking, utilities, day care, cable, taxes (if not included in your mortgage payment) are generally not included in your debt-to-income calculation. However, when you sit down to create a budget, be sure to include those items in your expense list.
Divide Your Total Monthly Bills By Your Income
To get your ratio, divide the total of your monthly bills above by your pretax, gross monthly income. This calculation will result in a number that will reflect your DTI ratio as a percentage. For example, if the result of your calculation is 0.325, then your DTI is 32.5% when converted to a percentage. You can also use our free DTI Calculator to make it easy.
What is Considered a Good DTI Ratio?
The lower your DTI ratio, the more flexibility you will have in your budget to save, give, make home repairs, travel, etc. Remember, the calculation uses your gross income, not your net income or take-home pay. When lenders look at your DTI ratio, lower is better. It deems you as more likely to be a reliable borrower that can make your payments on time.
- A debt-to-income ratio of 35% or less is considered good and debt should be manageable.
- With a debt-to-income ratio of 36% to 45%, there may be opportunity to improve your debt structure. You might consider a smaller mortgage to make your debt more manageable.
- A DTI of more than 45% indicates you may need to make some changes. A higher ratio means that you have little availability for funds to address unplanned expenses. This high ratio may affect your approval for a mortgage.
- DTI over 50%: Paying down this level of debt will be difficult, and your borrowing options will have a limit. Weigh different debt relief options, including bankruptcy, which may be the fastest and least damaging option.
To recap, your debt-to-income ratio (DTI) is the percentage of your gross monthly income that is spent on monthly debt payments. It’s important, because lenders use it to determine if you’re a good credit risk, and to qualify you for the best interest rates.
DTI in Real Life
A couple of months ago, my husband and I totaled one of our cars. We needed a replacement fast. We were following the debt snowball method to pay off our other debt, but now we needed to add another loan to the mix. I calculated our DTI ratio to be 25%. Even though we didn’t have room in our budget to afford a car payment, our DTI ratio said we did. Because we were following the debt snowball method, we were paying more than the minimum on one of our loan payments.
Before applying for a car loan, we use the calculator to determine how much of a car payment we could afford to stay in the “good” range. After reworking our budget, we got an Auto Loan with Alltru the next weekend. This bumped our DTI ratio to 34%, but we’re confident that we can manage our payments well, thanks to knowing the impact of our DTI ratio. Since we’re at the top of the “good” range, we don’t want to take on any more debt right now. Even though we’ve had to slow down our debt snowball payments, we’re still on track to pay off a Personal Loan by the end of the year!
As always, we’re here to help set you on the path to financial success. Before you apply for your next loan or credit card, figure out your DTI ratio to see how much you can really afford. Don’t hesitate to contact us to set up a free consultation.
