What Is Debt-to-Income Ratio and How Do You Calculate It?

A healthy debt-to-income ratio is important for two key reasons. First, lenders have specific debt-to-income guidelines for approving credit and setting your interest rate, and guidelines may differ from lender to lender.² Second, minding your ratio can help you manage a more comfortable household budget.

  
Debt-to-income is not your credit score and it’s not your debt-to-credit ratio. Your credit score, while important, is based mostly on payment history and doesn’t take your income into account like debt-to-income does. Your debt-to-credit ratio, better known as your credit utilization rate, shows how much credit you’ve used out of all the credit that is available to you.³ Both are important, but not to be confused with debt-to-income, which ignores available credit.⁴

The formula for your debt-to-income ratio is straightforward division, reflected as a percentage. The formula is simply DTI = Monthly Debt Payments/Gross Monthly Income.

 
Your Monthly Debt Payments amount is meant to represent your recurring, committed debt obligations, so it excludes things like groceries, gasoline, and utilities.⁵ To calculate it, add together your monthly payments for:

• Rent or mortgage (include taxes and homeowner insurance only if it is included in your monthly payment)
• Alimony or child support
• Student, auto, and other loans
• Credit cards (use the minimum payment for the calculation)

To calculate your Gross Monthly Income, add up your monthly income (before taxes and any other deductions) from all the following sources:

• Wages, salaries, tips, and bonuses
• Pension
• Social Security
• Child support and alimony
• Any other additional income

(If only annual amounts are known for some income sources, simply divide that figure by 12 before totaling the sum.)

The resulting percentage is known as your Back-End DTI, which is considered the default because it is the most comprehensive. Sometimes, mortgage companies calculate another version, called Front-End DTI, using the same formula but excluding all except the housing costs in the monthly debt payment amount. Front-end DTI can help mortgage companies understand your housing cost as a percentage of your income.

A debt-to-income ratio of 36% or lower is considered good by most lenders, and will give you better odds of qualifying for a loan or credit card, and for obtaining lower interest rates.⁶ Ratios of 43% are usually the highest mortgage lenders will consider.⁷

Improving your ratio is simple to describe but challenging to do: reduce your monthly payments, increase your income, or both. You can reduce your monthly payments by paying down credit card balances, paying off loans, or consolidating debts for quicker payoff.⁸ To increase your income you might ask for a raise, work extra hours, change jobs, or take on a side hustle.

In order to approve you for what’s known as a Qualified Mortgage (QM), most lenders require a debt-to-income ratio of 43% or lower.⁹ A QM is a loan that meets stringent regulations put into place after the 2008 financial crisis, essentially requiring lenders to determine your ability to repay.¹⁰ Though it’s no longer a requirement, most lenders still use a 43% debt-to-income ratio cut-off, combined with credit scores and down-payment amounts, to comply with these regulations.^5,11

Technically, though, Fannie Mae — a government-sponsored institution that backs up a significant portion of U.S. mortgages each year — allows loans to eligible borrowers with debt-to-income ratios as high as 50%.¹²