What's considered to be a good debt-to-income (DTI) ratio?

By Jean Folger AAA
A:

A debt-to-income ratio (DTI) is a personal finance measure that compares the amount of debt you have to your overall income. Lenders, including mortgage lenders, use the debt-to-income ratio as a way to measure your ability to manage the payments you make each month and repay the money you have borrowed.

To calculate your debt-to-income ratio, add up your total recurring monthly debt (such as mortgage, student loans, auto loans, child support and credit card payments) and divide by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out). For example, assume you pay $1,200 for your mortgage, $400 for your car and $400 for the rest of your debts each month. Your monthly debt payments would be $2,000 ($1,200 + $400 + $400 = $2,000). If your gross income for the month is $6,000, your debt-to-income ratio would be 33% ($2,000 / $6,000 = 0.33). If your gross income for the month was lower, say $5,000, your debt-to-income ratio would be 40% ($2,000 / $5,000 = 0.4).

A low debt-to-income ratio demonstrates a good balance between debt and income. Lenders like the number to be low because, according to studies of mortgage loans, borrowers with a lower debt-to-income ratio are more likely to successfully manage monthly debt payments. On the contrary, a high debt-to-income ratio signals that you may have too much debt for the amount of income you have, and lenders view this as a signal that you would be unable to take on any additional debt. In most cases, 43% is the highest ratio a borrower can have and still get a qualified mortgage. A debt-to-income ratio smaller than 36%, however, is preferable, with no more than 28% of that debt going towards servicing your mortgage. In general, the lower the number, the better the chance you will be able to get the loan or line of credit you want.

 

RELATED FAQS

  1. Can I get a balance transfer if I have bad credit?

    Transferring funds from one credit card to another is often possible with bad credit, but it will likely cost you in interest ...
  2. What are the different types of cash advances?

    Find out the different types of cash advances along with their different features to determine which option, if any, is best ...
  3. Is it better to get a balance transfer or a personal loan to pay off my credit card ...

    Find out what you should consider before deciding to pay off your credit card debt by taking out a personal loan or using ...
  4. How do balance transfers affect my credit score?

    Learn the ways a balance transfer can negatively and positively affect your credit so you can pay off debt while maintaining ...
RELATED TERMS
  1. Debt-To-Income Ratio - DTI

    A personal finance measure that compares an individual's debt ...
  2. Front-End Debt-to-Income Ratio - DTI

    A variation of the debt-to-income ratio (DTI) that calculates ...
  3. Credit Mix

    The types of accounts that make up a consumer’s credit report. ...
  4. Consumer Credit File

    A collection of data about an individual’s borrowing and repayment ...
  5. Negative Information

    Data in a consumer’s credit report that lowers his or her credit ...
  6. Revolver

    Revolvers are a major source of profits for credit card issuers ...

You May Also Like

Related Articles
  1. Take these 5 steps to getting the lowest possible rate for your mortgage. Small percentage differences can mean big savings down the line.
    Credit & Loans

    How To Shop For Mortgage Rates

  2. Budgeting

    Mortgages: How Much Can You Afford?

  3. Retirement

    Too Much Debt For A Mortgage?

  4. You may owe money, but you still have rights. There's a long list of things debt collectors are banned from doing to you. Know what's illegal.
    Credit & Loans

    5 Things Debt Collectors Can't Do To ...

  5. Sounds like a bad horror movie, but it really could happen to you. Here's how to identify zombie debt and send collectors back to the dead-debt graveyard.
    Credit & Loans

    How To Beat Off A Zombie Debt Collector

Trading Center