Debt-To-Income Ratio - DTI

AAA

DEFINITION of 'Debt-To-Income Ratio - DTI'

A personal finance measure that compares an individual’s debt payment to his or her overall income. A debt-to-income ratio (DTI) is one way lenders (including mortgage lenders) measure an individual’s ability to manage monthly payment and repay debts. DTI is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage. For example, John pays $1,000 each month for his mortgage, $500 for his car loan and $500 for the rest of his debt each month, so his total recurring monthly debt equals $2,000 ($1,000 + $500 + $500). If John’s gross monthly income is $6,000, his DTI would be $2,000 ÷ $6,000 = 0.33, or 33%.

INVESTOPEDIA EXPLAINS 'Debt-To-Income Ratio - DTI'

A low debt-to-income ratio demonstrates a good balance between debt and income. Conversely, a high DTI can signal that an individual has too much debt for the amount of income he or she has. According to studies of mortgage loans, borrowers who have lower DTIs are more likely to successfully manage monthly debt payments, so lenders prefer to see low numbers. In general, 43% is the highest DTI a borrower can have and still get qualified for a mortgage. A debt-to-income ratio smaller than 36%, however, is preferable, with no more than 28% of that debt going towards servicing a mortgage. While the maximum DTI will vary by lender, the lower the number, the better the chances that an individual will be able to get the loan or line of credit he or she wants.

There are two ways to lower DTI: reduce monthly recurring debt and/or increase gross monthly income. Using the above example, if John has the same recurring monthly debt of $2,000 but his gross monthly income increases to $8,000, his DTI would be $2,000 ÷ $8,000 = 0.25, or 25%. Similarly, if John’s income stays the same ($6,000) but he is able to pay off his car loan and reduce his monthly recurring debt payments to $1,500, his DTI would be $1,500 ÷ $6,000 = 0.25, or 25%. If John is able to both reduce his monthly debt payments to $1,500 and increase his gross monthly income to $8,000, his DTI would be $1,500 ÷ $8,000 = 0.1875, or 18.75%.

Not sure if your DTI is where it should be? Check out What's considered to be a good debt-to-income ratio?

RELATED TERMS
  1. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  2. Front-End Debt-to-Income Ratio ...

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

    The event in which companies or individuals will be unable to ...
  4. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  5. House Poor

    A situation that describes a person who spends a large proportion ...
  6. Gross Debt Service Ratio - GDS

    A debt service measure that financial lenders use as a rule of ...
RELATED FAQS
  1. Do all banks use the Five Cs of Credit when evaluating potential borrowers?

    Both individual and business borrowers are asked to provide information related to their credit history, income and debt ... Read Full Answer >>
  2. How does the loan-to-value ratio affect my mortgage payments?

    Several factors affect the mortgage rate you can obtain when you purchase a home. Lenders analyze credit histories and scores ... Read Full Answer >>
  3. How do banks measure the Five Cs of Credit?

    The five C's of credit is a valuable tool used by banks to determine a borrower's creditworthiness. Credit analysts developed ... Read Full Answer >>
  4. Why would a homebuyer need to take out PMI (private mortgage insurance)?

    Most conventional mortgage lenders carry strict requirements for home buyers, including credit history and score minimums, ... Read Full Answer >>
  5. What is a combined loan to value ratio?

    The combined loan to value (CLTV) ratio is a calculation used by mortgage and lending professionals to determine the total ... Read Full Answer >>
  6. What is the difference between debt to income and debt to assets?

    The debt-to-income ratio (DTI) is utilized in personal finance, while the debt to assets ratio is a leverage ratio used to ... Read Full Answer >>
  7. What is the difference between certified and non-certified private student loans?

    All student loans in the United States are required by federal law to be used only for their intended purpose: obtaining ... Read Full Answer >>
  8. Does my debt-to-income (DTI) ratio affect my credit score?

    A debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your gross income. Lenders ... Read Full Answer >>
  9. How do I lower my debt-to-income (DTI) ratio?

    A debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders ... Read Full Answer >>
  10. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    A debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your gross income. Lenders ... Read Full Answer >>
  11. How does my debt-to-income (DTI) ratio affect my ability to get a mortgage?

    A debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders, ... Read Full Answer >>
  12. What's considered to be a good debt-to-income (DTI) ratio?

    A debt-to-income ratio (DTI) is a personal finance measure that compares the amount of debt you have to your overall income. ... Read Full Answer >>
Related Articles
  1. Investing

    To Invest Or To Reduce Debt, That's The Question

    Find out how you can make use of that excess cash and improve your financial situation.
  2. Economics

    Successful Ways That Governments Reduce Federal Debt

    Governments have many options when trying to reduce debt, and throughout history some of them have actually worked.
  3. Retirement

    Two Roads: Debt Or Financial Independence?

    A higher income won't make you richer - unless you learn to live on less.
  4. 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.
  5. Personal Finance

    Dawn Of The Zombie Debt

    Are old debts coming back to haunt you? We'll show you how to keep these zombies from eating you alive.
  6. Credit & Loans

    Understanding Credit Cards

    Credit cards are a type of unsecured personal loan between the credit card issuer and the credit card holder.
  7. Taxes

    What is Adjusted Gross Income?

    Adjusted gross income (AGI) is a term from the Internal Revenue Code. AGI is used to determine a person’s income taxes due.
  8. Credit & Loans

    What is an Unsecured Loan?

    An unsecured loan is based on the creditworthiness of the borrower, and has no collateral securing the loan.
  9. Investing

    Why Some Investors Are Tilting Toward TIPS

    Last month’s five-year TIPS auction drew nearly $48 billion in interest, a sign of recent renewed demand for this inflation indexed asset among investors.
  10. Economics

    The Big Chill: What’s Wrong With The U.S. Consumer

    Based on the most recent April data, investors may, once again, be disappointed when the second-quarter gross domestic product (GDP) report comes in.

You May Also Like

Hot Definitions
  1. Fracking

    A slang term for hydraulic fracturing. Fracking refers to the procedure of creating fractures in rocks and rock formations ...
  2. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  3. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  5. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  6. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
Trading Center