Short answer: your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income. Lenders use it as one way to measure whether you can handle the payments on a new loan, and different lenders and loan products set different DTI limits (CFPB).
The formula
DTI = total monthly debt payments ÷ gross monthly income × 100
The CFPB example: $1,500 mortgage + $100 auto loan + $400 other debts = $2,000 a month. Divided by $6,000 of gross monthly income, that is a DTI of 33% (CFPB).
What counts
| What to include | |
|---|---|
| Debt payments | Credit card, student loan, auto loan and other loan payments, plus court-ordered fixed payments like child support. A home mortgage counts. Rent does not count in this ratio. |
| Income | Gross monthly income: everything before taxes and insurance, including job income and child support you receive. If it varies, use a typical month, and estimate low. |
Source for both rows: the CFPB debt-to-income calculator (CFPB). For a credit card, use the monthly payment you make, not the balance.
What is a good DTI?
The CFPB tool gives these guidelines for all debts combined (CFPB):
- Renters: consider keeping DTI at 15 to 20% or less (rent not included).
- Homeowners: consider keeping DTI at 36% or less (mortgage included). The CFPB notes some lenders will go up to 43% or higher.
These are planning guidelines, not loan rules. Each lender sets its own limit. In the CFPB's words, a DTI of 36% means "36 cents of every dollar earned is going to pay for debt, leaving you 64 cents to pay for everything else."
What a new loan does to your DTI: an example
Assumptions: a renter with $4,000 gross monthly income who pays $400 a month on a car loan and cards. They are looking at a $3,000 loan for 24 months at 24% APR, which works out to $158.61 a month (see the payment formula).
| Monthly debt payments | DTI | |
|---|---|---|
| Today | $400.00 | 10.0% |
| With the new loan | $558.61 | 14.0% |
The ratio goes from 10.0% to 14.0%. That is still under the CFPB renter guideline of 15 to 20%, but there is less room left for anything else. A lender will do this math too, so it is worth doing first.
Debt-to-income calculator
How to lower your DTI
- Pay down a balance with a monthly payment, for example a small card balance you can clear. The payment, not the balance, is what drops out of the ratio.
- Avoid new debt in the months before you apply.
- If you are using a loan to consolidate, check whether the new single payment is lower than the payments it replaces. If it is not, your DTI does not improve.
- A longer term lowers the monthly payment, and so the DTI, but usually raises the total interest. Compare both before you choose.
DTI is one factor. Lenders also look at your credit history, see what applying does to your credit and our steps for a loan with bad credit and no cosigner.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.