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 debts can I discharge when filing for bankruptcy?

    Discover which types of debt can be discharged through a Chapter 7 or a Chapter 13 bankruptcy and which debts require an ...
  2. Is the interest on a home equity line of credit (HELOC) tax deductible?

    Learn the advantages of using a home equity line of credit, and find out how these low-rate loans also qualify for a tax ...
  3. Do inquiries for preapproved offers affect my credit score?

    Find out what types of inquiries are on a credit report, if they affect a credit score and how much a score is affected by ...
  4. What debt cannot be discharged when filing for bankruptcy?

    See what kinds of debts cannot be discharged through a bankruptcy and which debts are very difficult to discharge unless ...
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. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  4. Billing Cycle

    The interval of time during which bills are prepared for goods ...
  5. Debt Consolidation

    The act of combining several loans or liabilities into one loan. ...
  6. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
Related Articles
  1. How To Shop For Mortgage Rates
    Credit & Loans

    How To Shop For Mortgage Rates

  2. Mortgages: How Much Can You Afford?
    Budgeting

    Mortgages: How Much Can You Afford?

  3. Too Much Debt For A Mortgage?
    Retirement

    Too Much Debt For A Mortgage?

  4. Transferring Credit Card Balances To ...
    Credit & Loans

    Transferring Credit Card Balances To ...

  5. Best Ways To Repair Your Credit Score
    Credit & Loans

    Best Ways To Repair Your Credit Score

Trading Center