What Is Your Debt-to-Income Ratio And How Do You Calculate It?

According to Gobankingrates.com, your debt-to-income ratio, or DTI, is one of the many factors that lenders consider when considering whether or not to lend you money. Your debt-to-income ratio (DTI) shows how much debt you have compared to your income. A larger DTI percentage is obtained when debt is combined with lower income, whereas a lower DTI percentage is obtained when debt is combined with higher income. Here’s how to figure out your DTI and how much debt you have in comparison to your income.

What Is A Debt-to-Income Ratio, And What Does It Mean?

The DTI ratio is calculated by dividing your minimum monthly debt payments by your gross monthly income. Financial responsibilities such as loans and monthly payments that are not discretionary, such as entertainment expenses, are referred to as recurring monthly debt.

The following are examples of recurring debt:

  • Rent or mortgage payments
  • Payments by credit card
  • Payments on auto loans
  • Alimony

Calculate The Debt-to-Income Ratio For Yourself

Use a debt-to-income ratio calculator or simply add up your minimum recurring debts – the least amount you’re obligated to pay on each creditor each month — to determine your debt-to-income ratio. Then divide it by your gross monthly earnings. The result is your DTI.

What Does a Good Debt-to-Income Ratio Look Like?

The Department of Housing and Urban Development is the government agency responsible for determining the average debt-to-income ratio and establishing housing loan criteria, including DTI limitations. According to the Consumer Financial Protection Bureau, a DTI of less than 43% is a decent number to aim for because it’s the greatest ratio a borrower may have and still get accepted for a qualifying mortgage. A qualifying mortgage has certain consistent elements that increase the likelihood that you will be able to afford the payments.

Why Is It Important For You To Know Your Debt-to-income Ratio?

Lenders consider your debt-to-income ratio to be a good indicator of your capacity to manage recurrent monthly payments as well as the potential monthly payment on a loan you might be offered. If you plan to take loans, it’s a good idea to understand your DTI and how to lower your debt-to-income ratio.