How to Calculate Your Debt-to-Income Ratio

How to Calculate Your Debt-to-Income Ratio

How to Calculate Your Debt-to-Income Ratio at a Glance:

  1. Tally all your monthly debt-related payments, including housing.
  2. Figure out your gross monthly income.
  3. Divide the first number by the second to get your DTI ratio

Whether you are trying to finance a major purchase or just want to maintain healthy credit, one area you should focus on—and one that many people overlook—is your debt-to-income ratio.

Why is your DTI ratio important, and how can you calculate it? Read on for answers to these questions.

Why a Good DTI Ratio Matters

Why should you be concerned about your debt-to-income ratio? Simple. Lenders look at this number to determine whether you will be able to repay a loan. The higher your DTI ratio, the less likely you will be to pay off new loans.

When you are trying to get financing for things like a car or a house, being denied financing can throw a wrench into things—your plans will have to be put on hold until you can improve your financial health.

In short, you need to maintain a good debt-to-income ratio so that your options remain open. To maintain a good DTI ratio, you need to know how to calculate it.

How to Calculate Your Debt-to-Income Ratio

  1. Calculate your monthly debt.

Not all of your monthly expenses are included when you calculate your debt-to-income ratio. For instance, groceries, energy charges, and gas for your car are not part of your DTI ratio. Conversely, housing costs are always included—as one of your biggest monthly expenses, your rent or mortgage payment makes up a large chunk of your monthly debt.

To figure out what other monthly bills you should include, one question is important to remember: Is there a minimum monthly payment? Credit card debt, student loans, auto loans, and personal loans are some of the most common examples.

Once you determine what is and is not included, add up all the monthly payments to get your monthly debt.

  1. Figure out your gross monthly income.

Next, you need to calculate your gross monthly income. Gross income is the amount of income you generate before taxes and other deductions come out. This includes the income you generate from a salary as well as any gifts, inheritance, and investments.

The higher your income is, the more debt you can accrue while still maintaining a good debt-to-income ratio.

  1. Divide the figure from step one by the figure from step two.

The last step is simple—divide your monthly debt by your gross monthly income. The result is your debt-to-income ratio. Here’s a breakdown:

  • Less than 36% – Considered a good DTI ratio. Your debt is manageable, and lenders should be willing to finance you.
  • Between 36-42% – May cause lenders concern, though many funding options should still be available.
  • Between 42-50% – Lenders are more likely to deny applications. You may want to consider speaking to a financial professional.
  • Over 50% – Borrowing options are extremely limited. You should consider your debt relief options.

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