Debt-to-income ratio (DTI) divides the total of all monthly debt payments by gross monthly income, giving you a percentage. Here’s what you should know:
Lenders use DTI — along with credit history — to evaluate whether a borrower can repay a loan.
Each lender sets its own DTI requirement.
Personal loan providers generally allow higher DTIs than mortgage lenders.
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How to calculate your debt-to-income ratio
To calculate your DTI, enter the payments you owe, such as rent or mortgage, student loan and auto loan payments, credit card minimums and other regular payments. Then, adjust the gross monthly income slider.
Here’s an example: A borrower with rent of $1,000, a car payment of $300, a minimum credit card payment of $200 and a gross monthly income of $6,000 has a debt-to-income ratio of 25%.
A debt-to-income ratio of 20% or less is considered low. The Federal Reserve considers a DTI of 40% or more a sign of financial stress.
How lenders view your DTI ratio
Lenders look at debt-to-income ratios because research shows borrowers with high DTIs have more trouble making their payments.
Each lender sets its own debt-to-income ratio requirement. Not all creditors, such as personal loan providers, publish a minimum debt-to-income ratio, but generally it will be more lenient than for, say, a mortgage.
Note that a debt-to-income ratio of 43% is generally the highest mortgage lenders will accept for a qualified mortgage, which is a loan that includes affordability checks.
You may find personal loan companies willing to lend money to consumers with debt-to-income ratios of 50% or more, and some exclude mortgage debt from the DTI calculation. That’s because one of the most common uses of personal loans is to consolidate credit card debt.
The required debt-to-income ratio for student loan refinancing varies by lender but generally, lenders look for DTIs of 50% or lower.
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Does your DTI affect your credit score?
Your debt-to-income ratio does not affect your credit scores; credit-reporting agencies may know your income but do not include it in their calculations.
But your credit-utilization ratio, or the amount of credit you’re using compared with your credit limits, does affect your credit scores. Credit reporting agencies know your available credit limits, both on individual cards and in total, and most experts advise keeping the balances on your cards no higher than 30% of your credit limit. Lower is better.
To reduce your debt-to-income ratio, you need to either make more money or reduce the monthly payments you owe.
How to understand your DTI ratio
Your DTI can help you determine how to handle your debt and whether you have too much debt.
Here’s a general rule-of-thumb breakdown:
DTI is less than 36%: Your debt is likely manageable, relative to your income. You shouldn’t have trouble accessing new lines of credit.
DTI is 43% to 50%: Paying off this level of debt may be difficult, and some creditors may decline any applications for more credit. If you have primarily credit card debt, consider a credit card consolidation loan. You may also want to look into a debt management plan from a nonprofit credit counseling agency. Such agencies typically offer free consultations and will help you understand all of your debt relief options.
DTI is over 50%: Paying down this level of debt will be difficult, and your borrowing options will be limited. Weigh different debt relief options, including bankruptcy, which may be the fastest and least damaging option.