What Is DTI Ratio? How to Calculate Debt to Income Ratio

What Is DTI Ratio?

DTI stands for debt to income ratio. This ratio is the percentage of your monthly income that goes to current monthly debt payments. The lower your debt to income ratio, the easier it will be for a lender to qualify for a loan, because you pose a lower borrowing risk to them.

Often lenders look for a debt to income ratio of no more than 36%, but can sometimes qualify a person who has up to a 43% debt to income ratio. Lenders use debt to income ratios to see whether or not you can afford to buy a piece of property with a mortgage.

It is easiest to calculate DTI as a percentage, because everyone has different income levels, debt levels, and purchasing power. A person might have a very high income and very high debt, or someone else might have a lower income and lower debt payments, but the two of them could have the same debt to income ratio.

How to Calculate Debt to Income Ratio

To calculate your debt to income ratio, you can either use an online debt to income ratio calculator, or you can calculate it yourself. For an easy way to calculate debt to income ratio, you divide all of your monthly debt payments by your monthly gross income. This is the same way that a lender will calculate your debt to income ratio.

For example, let’s say that you bring in $5000 per month in gross income. You have a monthly mortgage payment of $1000, a monthly auto loan payment of $250, and a monthly student loan payment of $250. Your total monthly debt payments equal $1500.

To calculate your debt to income ratio, divide your monthly debt payments  of $1500 by your monthly income of $5000 and you end up with a debt to income ratio of 30%. This is a great debt to income ratio, and a lender will likely be able to approve your loan!

DTI stands for debt to income ratio. In order to get a loan on a home, your lender will need to make sure that you have a good debt to income ratio, usually under 36%. To calculate your DTI, divide your total monthly debt payments by your total monthly gross income amount.