Your debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your gross income.

Why do you need to know it? Because lenders use it as a measure of your ability to repay the money you have borrowed or to take on additional debt like a mortgage or a car loan.

How to Calculate It

Debt-to-income ratio is calculated by dividing your total recurring monthly debt by your gross monthly income.

Start by adding up all of your recurring monthly debts.

Beyond your mortgage, other recurring debts to include are:

  • Auto loans
  • Student loans
  • Minimum credit card payments
  • Child support and alimony
  • Any other monthly debt obligations

Next, determine your gross (pre-tax) monthly income, including:

  • Wages
  • Salaries
  • Tips and bonuses
  • Pension
  • Social Security
  • Child support and alimony
  • Any other additional income

Now divide your total recurring monthly debt by your gross monthly income. The quotient will be a decimal; multiply by 100 to express your debt-to-income ratio as a percentage.

Can You Afford a Purchase?

If you are considering a big purchase, you should work out your debt-to-income ratio taking into account the new purchase. You can be sure that any lender considering your application will do so.

Use an online calculator to estimate the amount of the monthly mortgage payment or new car loan that you are considering.

Comparing your "before" and "after" debt-to-income ratio is a good way to help you determine whether you can handle that home purchase or new car right now.

Example

Here's an example of a debt-to-income ratio calculation.

Mary has the following recurring monthly debts:

  • $1,000 mortgage
  • $500 auto loan
  • $200 student loan
  • $200 minimum credit card payments
  • $400 other monthly debt obligations

Mary's total recurring monthly debt equals $2,300.

She has the following gross monthly income:

  • $4,000 salary from primary job
  • $2,000 from second job

Mary's gross monthly income equals $6,000.

Mary's debt-to-income ratio is calculated by dividing her total recurring monthly debt ($2,300) by her gross monthly income ($6,000). The math looks like this:

Debt-to-income ratio = $2,300 / $6,000 = 0.38

Now multiply by 100 to express it as a percentage:

0.38 X 100 = 38%

Mary's debt-to-income ratio = 38%

Less debt or a higher income would give Mary a lower, and therefore better, debt-to-income ratio. Say she manages to pay off her student and auto loans, but her income stays the same. Now the calculation would be:

Total recurring monthly debt = $1,600

Gross monthly income = $6,000

Debt-to-income ratio = $1,600 / $6,000 = 0.27 or 27%.