What is the Debt-to-Income (DTI) Ratio?
Your debt-to-income (DTI) ratio is a critical personal finance metric that compares your total monthly debt payments to your gross monthly income. This single percentage is one of the most important numbers lenders look at when you apply for a mortgage, car loan, or any other form of credit. It provides a clear snapshot of your financial health and your ability to manage payments responsibly. A DTI ratio calculator is an essential tool for anyone looking to understand their borrowing power and assess their financial standing before making major financial decisions.
The DTI Formula
The calculation for DTI is straightforward. You simply divide your total recurring monthly debt by your gross monthly income, then multiply by 100 to get a percentage.
DTI (%) = (Total Monthly Debt Payments / Gross Monthly Income) × 100
What counts as debt? Lenders typically include rent or mortgage payments, car loans, student loans, personal loans, and minimum credit card payments. Regular monthly expenses like utilities, food, and insurance are generally not included.
Why Lenders Care About Your DTI Ratio
From a lender's perspective, a high DTI ratio is a red flag. It suggests that a large portion of your income is already committed to existing debts, leaving little room for a new loan payment. This indicates a higher risk of default. As a result, lenders have established guidelines for acceptable DTI ratios:
- 36% or Less (Ideal): A DTI in this range is considered excellent. It shows that you have a healthy balance between your debt and income, making you a low-risk borrower with plenty of options.
- 37% to 43% (Manageable): This range is generally acceptable to many lenders, especially for mortgages. However, you may face higher interest rates or need to meet other strict criteria. This is often the maximum DTI allowed for a Qualified Mortgage in the U.S.
- 44% to 50% (High): In this range, your borrowing options become very limited. You may struggle to find a lender willing to approve a new loan.
- Over 50% (Very High): This DTI indicates a significant level of financial stress, and it is very unlikely that you will be approved for new credit.
Knowing your DTI before you apply for a loan allows you to take steps to improve it, such as paying down debt or increasing your income. If you're planning to buy a home, our House Affordability Calculator uses DTI as a key factor. For official guidance, the Consumer Financial Protection Bureau provides excellent resources.