How To Calculate Your DTI

Let’s talk about DTI. If you’re thinking, “D-T-what?” let us explain. DTI stands for debt-to-income ratio. This ratio represents how much debt you have versus the income you make. To calculate your DTI, you will divide your monthly debt payments by your monthly gross income. The ratio is critical to know if you want to purchase a home as it tells lenders how well you manage your debt and how likely you are to repay loans. But what factors make up your DTI? What ratio is considered “good?” How can you improve your ratio? This article breaks it all down for you in 1, 2, and 3. 

1. The Factors That Make Up Your DTI 

Your DTI ratio consists of two things: your debt payments and your income. To calculate your ratio, you will first need to add up all of your monthly debts. Monthly debts are the payments you make each month on a car loan, personal loan, credit card payment, student loan, alimony payment, or child support payment. So while you may owe $30,000 on a truck, if your monthly payment is $485, that’s the number that matters here. 

Once you have all your monthly debts together, you can add them up to get your total monthly debt. Keep in mind that other monthly bills and financial obligations, like groceries or gym memberships, are not factored into your DTI. 

Next, you will need to determine your gross monthly income. Gross monthly income is the total income you earn from all sources each month before taxes are applied. This could be a paycheck from an employer, self-employment income, investment dividends, bonuses, commissions, or other sources of income. 

For example, if your monthly debt equals $5,000 and your gross monthly income is $9,000, your DTI ratio is about 55% (5,000/9,000=0.55).

2. What Is An Ideal Debt-To-Income Ratio?

Unlike a credit score where a higher number is better, when it comes to DTI, the lower your ratio, the better off you are. Here are our general guidelines for DTI ratios: 

  • 35% or less: Great! - This is the ideal range for purchasing a home. With a DTI ratio of less than 35%, your debt is at a manageable level.
  • 36% to 49%: Fair - A DTI of 35-49% is ok, but you should consider lowering your DTI before purchasing a home.
  • 50% or more: Poor - If your DTI is 50% or more, your financial situation is not where it needs to be to purchase a home. You likely have high credit card balances and make minimum payments each month. You should take immediate action to lessen your debt.

Quick note: Although the VA does not have any DTI requirements, most banks and lenders will require a DTI ratio of 60% or less.

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3. How To Lower Your Debt-To-Income Ratio

If you find yourself with a DTI ratio of more than 35%, you should rethink your financial goals before purchasing a home. Buying a home will likely be the largest purchase of your life, and you want to start off on a solid foundation. While missing a credit card payment may not seem like a big deal, missing a mortgage payment is and can lead to foreclosure. 

To get your DTI ratio under control, focus on paying down debt with these four tips:

  • Make a spreadsheet of all your monthly expenses. Include everything and categorize it appropriately. For example, “Amazon” could be one category, “clothes” another, and “groceries,” “rent,” and “phone bill” the last three. See where you are overspending, and funnel that money towards debt instead. For example, if you spend $400 a month on Amazon (easy to do!), cancel your Prime membership and put that money towards your credit card bill instead. 

  • Find ways to lower your monthly payments. If you have a personal loan and two credit cards totaling $750 per month, see if you can refinance and consolidate the debts. For example, taking out a new lower interest personal loan with all three debts bundled together could save you hundreds of dollars each month. 

  • Pay off small balances first. If you have a credit card with a few thousand on it, pay that off first to get it out of the way. Once you see how good it feels to pay things off, you will be more motivated to tackle larger debts. 

  • Lastly, embrace the gig economy to make some extra money. Paying off debt can sometimes feel impossible, but making a few hundred extra dollars each month can make a big difference in your financial journey. Try delivering food, walking dogs, or starting a freelance gig. 

Try our mortgage calculator app to calculate your DTI over time and see what kind of home you can afford as you go along your journey.