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 a debt collector contact me about a debt that's no longer on my credit report?

    According to Experian, a debt collector is permitted to contact a consumer about a debt that is no longer on the consumer's ... Read Full Answer >>
  2. Can personal loans be transferred to another person?

    Personal loans cannot be transferred to another person, because these loans are determined based on your unique credit score ... Read Full Answer >>
  3. Are personal loans considered income?

    Personal loans are not considered income for the borrower unless the loan is forgiven. In other words, you cannot be taxed ... Read Full Answer >>
  4. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  5. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  6. Do free credit reports affect your credit score?

    Free credit reports do not impact your credit score. Credit inquiries are divided into two categories: soft inquiries and ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    How To Shop For Mortgage Rates

    Take these 5 steps to getting the lowest possible rate for your mortgage. Small percentage differences can mean big savings down the line.
  2. Budgeting

    Mortgages: How Much Can You Afford?

    Answering this means number-crunching as well as factoring in other considerations and expenses.
  3. Retirement

    Too Much Debt For A Mortgage?

    Just because a lender is willing to offer you a loan doesn't mean you should take it.
  4. Credit & Loans

    5 Extreme Ways To Raise Your Credit Score

    Desperate to rebuild your credit score because you can’t obtain a loan with a decent interest rate? Here are some extreme options to try.
  5. Personal Finance

    The Top 5 Personal Finance Experts to Follow in 2016

    Here is a look at five money and investing experts who can help you reach your financial goals for 2016.
  6. Credit & Loans

    Top 5 Reasons Why People Go Bankrupt

    The biggest cause of bankruptcy in the United States is medical expenses.
  7. Term

    Who Benefits from Microfinance?

    Microfinance describes banking services provided to low-income people or groups. Specific services offered by microfinance institutions include microloans, micro-savings and micro-insurance products.
  8. Home & Auto

    What to Do When You Can No Longer Afford Your Car

    Life is full of unexpected and undesired events, like layoffs or divorce. Unfortunately, these events can sometimes make your car payment unaffordable.
  9. Insurance

    Cashing In Your Life Insurance

    In tough economic times, tapping into a life insurance policy can provide a needed source of funds.
  10. Retirement

    7 Ways to Use a Strong Credit Score During Retirement

    Find out why it is important to maintain a good credit in retirement. Learn seven reasons not to leave your credit score behind when you retire.
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. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  4. Credit Rating

    An assessment of the creditworthiness of a borrower in general ...
  5. Debt/Equity Ratio

    Debt/Equity Ratio is debt ratio used to measure a company's financial ...
  6. Personal Property Securities Register (PPSR)

    A written, public, online record of legal claims to personal ...
Trading Center