Debt-to-income ratio (DTI) = monthly debt payments ÷ gross monthly income. With $2,100 of monthly debt payments on a $5,000 monthly salary, your DTI is 42%. Lower is better; many lenders prefer ratios around 36% or less.
[cb_ad]
Worked example
| Monthly payment | Amount |
|---|---|
| Rent | $1,400 |
| Car loan | $350 |
| Student loan | $200 |
| Credit card minimums | $150 |
| Total debt payments | $2,100 |
| Gross monthly income (before taxes) | $5,000 |
| DTI | 42% |
[cb_photo id=»19-B» alt=»Notebook listing monthly income, expenses and debt payments to calculate DTI» caption=»Add up monthly debt payments, then divide by gross monthly income.»]
What counts, and what doesn’t
- Counts: rent or mortgage payments, car loans, student loans, personal loans, minimum credit card payments, child support or alimony you pay.
- Usually doesn’t count: utilities, groceries, phone bills, insurance and subscriptions.
How a new loan changes your DTI
Adding a $10,000 personal loan at $222 a month raises the example DTI from 42% to about 46%. That’s why lenders check DTI: they want to know a new payment still fits.
What lenders look for
Lower is always better. Many lenders prefer a DTI around 36% or less, and ratios above about 43% can make approval much harder, especially for mortgages. Each lender sets its own limits.
How to lower your DTI
- Pay down balances with the highest monthly payments first, if you’re about to apply for a loan.
- Avoid taking on new debt in the months before an application.
- Increase income you can document, such as a raise or steady side income.
- Consider refinancing to a lower payment, keeping total cost in mind.
Front-end vs. back-end DTI
| Ratio | What it includes | In our example |
|---|---|---|
| Front-end | Housing payment only | $1,400 ÷ $5,000 = 28% |
| Back-end | All monthly debt payments | $2,100 ÷ $5,000 = 42% |
Mortgage lenders often look at both. For most other loans, the back-end ratio is the one that matters.
How much room do you have?
Multiply your gross monthly income by your target ratio, then subtract what you already pay. Using 36% as an example target:
| Gross income | Current payments | DTI now | Room up to 36% |
|---|---|---|---|
| $5,000 | $2,100 | 42% | None (already above) |
| $5,000 | $1,200 | 24% | $600 a month |
| $3,500 | $900 | 25.7% | $360 a month |
«Room» is what a lender might accept, not what your budget can comfortably handle. Check both before taking on a new payment.
What counts as income
- Salary and wages before taxes.
- Self-employment or side income you can document, often averaged over time.
- Other regular income you can prove, depending on the lender’s rules.
More questions
Is DTI part of my credit score?
No. Your income isn’t on your credit report. Lenders calculate DTI separately when you apply.
Do lenders use gross or net income?
Gross income, before taxes and deductions, in most cases.
What’s the difference between front-end and back-end DTI?
Front-end uses only housing costs; back-end uses all debt payments. In the example, front-end is 28% and back-end is 42%.
What is a good debt-to-income ratio?
Below about 36% is generally seen as healthy. Lenders set their own limits, and some accept higher ratios for certain loans, but a lower DTI usually means better offers.
What debt-to-income ratio do you need for a personal loan?
It varies by lender. Many prefer a DTI under roughly 36% to 40%, and a lower ratio can help you get a lower APR.
How can I lower my debt-to-income ratio?
Pay down the debts with the biggest monthly payments, avoid taking on new debt before you apply and, if you can, increase your income.
The bottom line
Add up your monthly debt payments, divide by your gross monthly income and aim to keep the result low before applying for credit. Check how much a new loan would add first: see what a $10,000 loan costs per month.
Sources
Educational content only, not financial advice. Lenders use their own criteria; this is a general explanation.