How to Calculate Debt to Income Ratio

Last Updated: February 26, 2024

Learn how to calculate your debt-to-income ratio

While there are no hard rules on ideal debt-to-income ratios, many financial experts recommend keeping your ratio below 36%. This proper debt-to-income ratio is considered a benchmark for maintaining financial stability. However, an acceptable ratio can vary depending on your circumstances.



It's important to note that a 50 percent debt-to-income ratio is often seen as a critical threshold, exceeding this can significantly impact your ability to qualify for additional credit or favorable loan terms.

Here are some general DTI ratio guidelines:

• Under 36% - Excellent
• 36% to 49% - Acceptable
• Over 50% - May make qualifying for additional credit more difficult

The lower you can keep your DTI ratio, ideally aiming for a zero debt-to-income ratio, the better positioned you will be financially.Work on reducing debts and increasing income to reach a target ratio below 36%.

Debts That Go into the Debt Income Ratio DTI

Calculate your debt by adding together all monthly debt payments that are recurring. This could be credit card payments, rent or mortgage payments, child support payments, student loan payments, conventional loans, personal loans, and car loans.

Think of monthly debt obligations that bear interest as you decide whether to include them in the total monthly debt obligations.

What Not to Include

Don't include other monthly bills like utility bills or other non-interest-bearing bills or monthly costs for living expenses.

Income That Goes into the Debt to Income Formula

The income that you will use for the debt-to-income ratio is your gross monthly income. This means your income before taxes are taken out.

If your pay varies monthly, divide your annual income by 12 for an average monthly income.

What Not to Include

Don't include other income like alimony or child support payments.

The Debt to Income Ratio Formula

Calculate your DTI with the following formula: total debt divided by gross monthly income times 100.

Let's say you have a total monthly debt payment of $5,000 and a gross monthly income of $6,000. The first number you get is 0.8333. Multiple this number by 100 and you get 83.3%. In this example, your DTI is 83%.

If you have $5,000 in debt and $4,000 in gross monthly income, your first number is 1.25. Multiply by 100 to get a percentage: 125%.

If you have $2,000 in debt and $6,000 in gross monthly income, your first number is 0.33. Multiply by 100 to get a percentage: 33%.

It's pretty simple, but if you prefer to use a debt-to-income ratio calculator, there are several available online.

What Do Those Numbers Mean?

Now that you know how to calculate debt to income ratio, what do the numbers actually mean? In the first example, you have a DTI of 83%. This means that 83% of your income covers your total monthly debt payments.

In the second example, 125% DTI, means that you are spending more on your total monthly debt payments than you have a gross monthly income.

In the third example, 33%, you are spending 1/3 of your gross monthly income on debts.

The higher your debt-to-income ratio, the lower the probability that you will be able to repay a new loan.

What is a Good Debt-to-Income Ratio?

Banks and other creditors have an upper limit of 43% to qualify for a mortgage. The preferred DTI is 36%. The lower your DTI and the better your credit score, the easier it will be to get good loan terms and the best interest rate.

Learn more about your debt to income ratio by reading What Does Debt To Income Ratio Mean And What Should Yours Be

Mortgage to Income Ratio

There is a slightly different way that mortgage lenders look at your income to determine how much mortgage you can qualify for during the mortgage process.

Your mortgage to income ratio is calculated in exactly the same way as debt to income ratio, but with total monthly mortgage payments instead of debt payments.

The standard in the 28% rule which suggests that you should pay no more than 28% of your gross monthly income on your monthly mortgage payments.

Let's say you make $6,000 a month. You can afford home payments of $1,680. As of 2022, the average monthly mortgage payment is $1,100.

Your mortgage payment can also be figured as 25% of your post-tax income.

The second method is the 35%/45% which states that you should pay no more than 35% of your pretax income or 45% of your net (post-tax) income on mortgage loan payments. This gives you a range for your house payments.

If you are looking for a home, a real estate agent or mortgage broker can help you determine your mortgage-to-income ratio.

If you have a higher debt-to-income ratio, shop around for a lender who may be able to help - there are different ways to decrease your MTI.

There are also DTI ratio lenders who will consider higher DTI. In addition, FHA loans and VA loan options may look at higher DTI ratio loans.

How Can I Improve My Debt to Income Ratio DTI?

You have two methods to improve your DTI ratio. The first is to earn more money each month. The second is to repay debts until you reach your target DTI.

One way to improve your credit utilization ratio (see below) and get your expenses under control is to consolidate debt into one loan and then focus on paying off that personal loan.

Similar Terms

There are several other terms that may sound like debt to income.

Debt to Equity Ratio

Debt to equity is used to evaluate the health of the company and if it is a good risk to take out loans to cover business expansion, new equipment or buildings, etc. Learn more about what constitutes a favorable metric in our guide on What is a Good Debt to Equity Ratio.

Credit Utilization Ratio

The credit utilization ratio is a comparison of your revolving debts versus your revolving debt credit limits. This looks at how much of your credit limit you are using with the lower the better.

Revolving debt generally involves credit card balances versus credit card limits.

Your credit utilization rate should be below 30%. If it is higher than 30%, focus on paying down your revolving debt balances.

Improving this ratio will improve your credit scores as this is the second most important part of your credit report.

Front End Ratio

This ratio is also known as the housing to income or basic housing ratio and is used by lenders to decide if you can pay back a mortgage. This is very similar to the mortgage-to-income ratio but includes all income and utility costs, property taxes, homeowners insurance, and HOA costs.

Back End Ratio

Back end ratio is the same as debt to income ratio.

Understanding Debt Settlement Options

Sometimes, as you navigate your financial situation, you might also encounter scenarios where settling your debt could be an option. If you're considering this route, using a debt collector settlement calculator can be beneficial. This tool can help you gauge the potential savings if you were to settle your debt rather than paying it in full. Knowing this figure can inform your decision and help you strategize your negotiations with collectors.

How Pacific Debt Relief Can Help

If you have too much debt and are having trouble making even minimum monthly payments, Pacific Debt Relief may be able to help you.

Are monthly payments compressing your lifestyle? Do you need to adjust your debt-to-income ratio drastically? Then take advantage of increasing cash flow by utilizing Pacific Debt Relief.

Some of our clients find themselves getting in front of credit card payments while decreasing other monthly debt, and with other debt payments reduce debt drastically. With an expanded income ratio and a personalized debt relief plan, clients find that paying other obligations, such as auto loans, rent payments, and other monthly debts becomes less of a hassle. It's beneficial both financially and emotionally.

Pacific Debt Relief is one of the leading debt settlement companies in the US. We work directly with your creditors to reduce your existing debt, often for substantially less than you owe. We work with most major credit card companies and know which ones tend to settle.

Get your free consultation today. Your initial phone call is 100% free, and our debt experts will explain your options, so you fully understand them.

FAQs

Conclusion

Your debt-to-income ratio is a key indicator of your financial health and loan repayment abilities. By calculating your DTI and keeping it low, you can put yourself in a better position to get approved for mortgages, auto loans, and other financing.

Aim for a target DTI below 36% by reducing debts through consolidation or credit counseling. Avoid taking on additional debts when possible. And consider all your important debt ratios - not just DTI - for a full financial picture.

Monitoring and improving your DTI takes discipline but pays dividends through increased financial flexibility. With a personalized debt reduction plan, Pacific Debt Relief can help you calculate, understand, and optimize your debt-to-income ratio. Contact us today to start improving your financial health.

Get your free consultation today. Your initial phone call is 100% free, and our debt experts will explain your options, so you fully understand them.

*Disclaimer: Pacific Debt Relief explicitly states that it is not a credit repair organization, and its program does not aim to improve individuals' credit scores. The information provided here is intended solely for educational purposes, aiding consumers in making informed decisions regarding credit and debt matters. The content does not constitute legal or financial advice. Pacific Debt Relief strongly advises individuals to seek the counsel of qualified professionals before undertaking any legal or financial actions.