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. What do creditors have to report to credit bureaus?

    Protect your credit score by understanding how creditors report information about your debts and payments, which can affect ...
  2. What is the difference between compounding interest and simple interest?

    Learn about simple interest and compound interest, how to calculate the two types of interest and the main difference between ...
  3. How do I get a higher limit on my credit cards?

    Understand how credit limits work with major credit card companies and things you can do to get a higher limit on your credit ...
  4. Does shopping for the best interest rate affect my credit score?

    Learn about hard and soft credit inquires and how shopping for credit may negatively affect credit scores. Explore strategies ...
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. Straight-Roller

    A credit card account which is increasingly delinquent, and in ...
  4. Keep And Pay

    A bankruptcy allowance that lets an individual keep an asset ...
  5. Credit Freeze

    A credit freeze, also called “security freeze,” is a freeze on ...
  6. Deadbeat

    A slang term for a credit card user who pays off his or her balance ...

You May Also Like

Related Articles
  1. Term

    Debt-To-Income Ratio - DTI

  2. Credit & Loans

    How To Shop For Mortgage Rates

  3. Budgeting

    Mortgages: How Much Can You Afford?

  4. Term

    Front-End Debt-to-Income Ratio - DTI

  5. Retirement

    Too Much Debt For A Mortgage?

Trading Center