What Is Debt-to-Income Ratio?

Your debt-to-income ratio (DTI) is an important factor in determining whether a lender will approve you for a home loan (or any other type of loan), and it’s not as complicated as you might have been led to believe.

It’s simply a way for lenders to compare how much debt you owe vs. the income you bring in. If you have a lot more debt than income, lenders might think twice before approving a loan. If your debt-to-income ratio is more income than debt, you’re more likely to be approved.

Knowing your DTI is important for both you and your lenders to assess whether you’ll be able to handle a mortgage payment along with your other bills, so it’s a good idea to understand how it’s calculated and what you can do to influence it.

How Is My Debt-to-Income Ratio Calculated?

Lenders typically express your DTI as a percentage. To calculate it, divide your total monthly debt by your gross monthly income (include your entire household’s income before taxes).

Example:

Total monthly debts are $300 (auto loan) + $200 (student loans) + $1,000 (potential mortgage payment) = $1,500

Total monthly gross income = $4,500

$1,500 ÷ $4,500 = 33.33

This debt-to-income ratio is 33%.

To try it yourself, plug in your potential mortgage payment and your other monthly debts to see what your DTI would be. Don’t include your current rent payment—this calculation reflects what your finances may look like once you own a home.

Mortgage payment calculation should include:

• Principal and interest
• Property taxes
• Homeowners insurance
• Private mortgage insurance (PMI)
• Condo or homeowners association fees, if any

Monthly debt calculations should include:

• Housing payment (your potential mortgage)
• Auto loans
• Personal loans
• Credit cards
• Alimony or child support
• Student loans

While DTI doesn’t include variable bills like utilities or groceries, having an idea of those costs can still help you better understand your overall financial picture.

What Is Considered a “Good” Debt-to-Income Ratio?

Generally, the lower your DTI the better. Lenders typically prefer a DTI of 35% or less, with no more than 28% of that debt going toward your mortgage.

DTI ranges:

• 35% or less: You’re in a good place financially.
• 36% to 43%: You’re doing fine but may want to reduce debt.
• 44% or higher: A large portion of your income is going to debt and action is needed.

Ways to Improve Your Debt-to-Income Ratio

Improving your DTI is simple in theory, but it takes time and effort. You’ll need to:

• Lower your debt
• Increase your income

Depending on the type of debt you have, debt consolidation may be an option. This involves combining multiple balances into one monthly payment, often at a lower interest rate, which can help you pay off debt faster.

You can also look for ways to save money in your day-to-day life. That doesn’t mean you have to give up every small pleasure—balance matters.

Money-saving tactics to consider:

• Set up a budget and stick to it
• Direct part of each paycheck into savings
• Use a high-yield savings account or savings certificate
• Cut spending on unused subscriptions or services
• Use sales, coupons, and loyalty programs
• Add a browser extension that applies coupons automatically
• Adjust your thermostat to reduce energy usage when you’re away
• Buy second-hand items when possible
• Delay impulse purchases by waiting before buying
• Avoid opening new credit cards and pay balances in full when you can

You may not be able to change your income quickly, but being disciplined about spending and reducing existing debt can have a real impact on your debt-to-income ratio.

Ready to buy? Get in touch with our local mortgage lending experts or get preapproved. 

Still researching? Explore our Mortgage Learning Center.