Debt to Income (DTI) Ratio Calculator 2023
Debt To Income Ratio Calculation
Gross Monthly Income | $5,833 |
Total Monthly Debt | $1,923 |
The calculator above provides the Debt to Income (DTI) ratio which measures the percentage of gross monthly income that goes towards monthly debt and interest repayments. A good DTI ratio to maintain is anywhere below 36%, whereas, an exceptional DTI ratio is any value less than 20%. The DTI ratio is a very useful measure for home buyers and mortgage lenders as it is a requirement for most mortgage programs including FHA Loan, VA Loan, and USDA Loan.
How is the Debt to Income Ratio Calculated?
The DTI ratio is calculated by dividing your monthly debt payments by your gross monthly income. For example, if you have the following income and debt information:
Annual Income (Includes Co-borrowers) = $48,000
Monthly Gross Income = $4,000 (Annual Income = $48,000 / 12)
Monthly Debt Payments:
- Minimum Credit Card Payment = $50
- Student loan payment = $350
- Auto Loan Payment = $400
- Personal Loan Payment = $700
Which sums up to $1,500
Debt To Income Ratio = 37.5% ($1,500 / $4,000) * 100
Household Debt Service Payments as a Percent of Disposable Personal Income
Source: Federal Reserve Bank of St. Louis
What is Included and Not Included in the Debt to Income Ratio?
Average U.S. Consumer Debt Makeup in 2021 Q3
The two categories of information required for the debt to income ratio are gross monthly income and monthly debt.
Mortgage ~ 67.2%
Student Loan ~ 10.5%
Auto Loan ~ 9.3%
Credit Card ~ 5.1%
Personal Loan ~ 2.9%
HELOC ~ 1.9%
Home Equity ~ 0.7%
Credit Card ~ 0.7%
Other ~ 1.6%
Source: Experian
Gross Annual Income
When entering your income, be sure to include the sum of the annual gross income (before taxes) of both the borrower and the co-borrower (if there is one). Income includes salary, bonus, commission, tips, and investment gain. The calculator will automatically calculate your gross monthly income.
Total Monthly Debt
- Mortgage Payments = Monthly payment for your mortgage + Monthly Payments for insuring your mortgage + Monthly property taxes + Condo or homeowner association fee + other unavoidable house expenses.
- Minimum Credit Card Payments - Credit card debt entered should be the minimum payment that needs to be paid not the actual amount owed, for example, if the minimum payment required by your lender is $50 and the actual credit card debt is $300, use the $50 value for the calculation.
- Student Loan Payments - The monthly student loan payment that is required.
- Auto Loan Payments - The monthly auto loan payment that is required.
- Loan Payments - If you have personal loan payments enter the monthly required amount.
- Alimony Payments - Also called maintenance, spousal support and spouse maintenance.
- Child Support - Ongoing, periodical payment made by a parent for the benefit of their child.
- Other Loan payments - If you have other loans that have monthly debt payments that cannot be canceled, they must be included too.
Average U.S. Consumer Debt Balance by Debt Type in 2021 Q3
Source: Experian
What Information is Not Included in the Debt to Income Ratio?
There are certain expenses that are not included in the DTI ratio calculation, a rule of thumb is that any payment that can be canceled or removed should not be included. The following expenses should not be included:
- Utility expenses such as electricity, water, cable, internet, cellular service
- Transportation costs (apart from auto loan payments)
- Contributions to savings account or 401K and IRA
- Living expenses such as food, clothing and luxury goods
Do I Include Future Housing Expenses in the Debt to Income Ratio?
If you are buying a home and know your total mortgage payment, you can include it in the debt payments. The lender you are working with will often include this in your DTI ratio once the home buying process begins.
Comparing Debt to Income Ratios
What should my Debt to Income Ratio be?
In most cases, a DTI ratio of less than 20% is considered exceptional as it shows that only 20% of monthly income before tax is going towards debt payments. Therefore, there is potential to take on more debt if required with a lower risk of default as compared to someone with a much higher DTI ratio. However, a DTI ratio of 20% is very hard to maintain, therefore, a debt to income ratio of less than 36% is considered good.
Should I have a High or Low Debt to Income Ratio?
A lower debt to income ratio is preferred. The reason for a low DTI is that a smaller portion of monthly income goes towards debt payments and hence there is an opportunity for more debt to be added. The higher the DTI ratio, the more likely the borrower will be unable to make repayments.
Debt to Income Ratio Requirements
Lenders View on Debt to Income Ratio
The DTI ratio is a very important requirement for most lenders as it demonstrates the ability of the borrower to make their debt payments. The following table provides information regarding DTI levels:
| DTI Range | Description |
|---|---|
| DTI < 20% | This is an excellent DTI ratio and shows that you have room to borrow more debt if required |
| 20% < DTI < 36% | This is a good DTI ratio and is accepted by most lenders |
| 36% < DTI < 42% | This is an average DTI ratio, it is within the acceptable region for lenders, however, it will be difficult to borrow more funds |
| 42% < DTI < 50% | This is a bad DTI ratio as it is too high for most lenders making it very difficult to borrow or take loans |
| DTI > 50% | This is a very poor DTI ratio and will result in rejection by a majority of lenders. It will also be very difficult to pay off the debt. |
A DTI of less than 20% is excellents because a very small portion of income is going towards debt repayments which will result in higher savings after other bills are paid. A DTI ratio higher than 20% and less than 36% is still a good DTI as it shows the debt is manageable and a majority of the income is still available for other use. A DTI ratio higher than 36% but less than 42% is an adequate ratio as you still qualify for most mortgage programs; however, there is room for improvement. A DTI ratio higher than 42% but less than 50% is a bad DTI ratio as there are limited funds to spend or save after all monthly debts have been paid. A DTI ratio of greater than 50% is considered very poor as this means the total monthly debt payments require half of what is earned in the month before taxes and hence it is not acceptable by most mortgage programs.
What is the Debt to Income Ratio Requirement for different Mortgages?
Different mortgage programs have different DTI ratio requirements:
| Mortgage Program | Maximum DTI Ratio Allowed |
|---|---|
| Conventional Loans | 50% |
| FHA Loan | 43% |
| VA Loan | 41% |
| USDA Home Loan | 41% |
Conventional loans allow a DTI ratio of up to 50%, however, this will result in very high mortgage rates and other strict requirements by the lender. The majority of lenders will not accept a DTI ratio of 50%; most lenders will typically want a DTI ratio of less than 43%. FHA loan, VA loan, and USDA loan DTI ratios are relatively lower than conventional loans as these programs' main goal is to promote homeownership without putting additional debt burden on borrowers.
Is my Credit Score affected by the Debt to Income Ratio?
No, credit score is not affected by the debt to income ratio as credit agencies do not include income when calculating your credit score. However, individuals that have a high debt to income ratio might have a larger outstanding balance on their credit cards, which affects the credit utilization ratio.
Credit agencies do look at the total credit utilization ratio which measures the percentage of credit used as compared to the max credit limit that is allowed by your lender. For example, if you have a credit limit of $5,000 and in a month if you spend $3,000 on your credit card, the credit utilization ratio is equal to 60% ($3,000/$6,000). The credit utilization ratio should not be greater than 30% when applying for a mortgage or a large loan. Therefore, high debt levels will affect the credit utilization ratio which in turn will affect your credit score.
Front End Vs. Back End Debt to Income Ratio
What is the Front-end Debt to Income Ratio?
The front-end DTI ratio, also known as the housing ratio, is concerned with monthly home expenses. The ratio calculates the percentage of gross monthly income that goes towards mortgage payments, Private Mortgage Insurance (PMI), property tax, homeowners insurance, and HOA fees.
For example, if your gross monthly income is $6,000 and monthly mortgage payments on a 30-year fixed $400,000 home with 3% mortgage rate is $2,000, then your front-end DTI is 33.3% ($2,000/$6,000). The front-end ratio should be lower than 28% to secure lending without any problem.
What is the Back-end Debt to Income Ratio?
The back-end DTI ratio measures all debt including housing debt, and other debt such as credit cards, student loans, auto loans, personal loans, alimony, and HELOC, etc. The above calculator helps you calculate your back-end debt to income ratio which is used by lenders to determine if you are eligible for a mortgage. Lenders will also add an estimate of the mortgage payment that you will pay if you are approved for the mortgage. The back-end ratio should be less than 36% to be considered good.
Reducing Your Debt to Income Ratio
1. Budget & Save
One of the biggest reasons for large amounts of debt is poor financial planning resulting in excess expenditure and limited savings. Therefore, create a monthly budget and track all your expenses, this can help you reduce unnecessary costs. After you have a strict budget, you can try to save more which can help pay down debt.
2. Pay Down Debt
There are two popular methods that are used to pay down debts:
- Snowball Method: In this method, you first order your debts in terms of the total amount, then you focus on paying down the smallest debt while paying the minimum amounts for the larger loans. Once the smallest debt is paid, the next smallest debt is chosen. This allows you to remove debt payments from your monthly expenditure and over time you focus only on the larger debts like loans and mortgages.
- Avalanche Method: In this method, you do not pick the loan based on the smallest amount, rather you pick the loan based on the interest rate charged. The debt with the highest interest rate will be paid down first, while other debts will only receive the minimum amount. Once the highest interest rate loan is paid, the next highest one is chosen. The rationale behind this is that you pay off the loans that charge you the highest interest payments resulting in lower overall interest paid for all your debts.
3. Debt Consolidation
The next suggestion would be to try to consolidate your debt into accounts that have lower interest rates. Credit cards tend to have very high-interest rates. Hence, you should first try to reduce the interest rate charged by calling your lender which might be possible if you are regular on your payments.
Second, consolidate the debt into lower interest rate accounts, for example, you can take a personal loan that has a lower interest rate as it is paid out over a longer period of time.
4. No Additional Debt
This is a simple suggestion and very straightforward. If you are trying to reduce your debt, it is contradictory to take on more debt or overcharge your credit card.
5. Increase Income
The first four suggestions focused on reducing and managing debt, which affects the numerator of the ratio (Debt/Income), this suggestion affects the denominator where you try to increase your income. You can try to increase your income by asking for a raise or offering to work overtime.
Overtime is the best way to earn some extra cash and increase your income. Apart from overtime, a part-time job is the next best alternative to supplement your income.
Frequently Asked Questions
What information is Included in the Debt to Income Ratio?
A debt-to-income ratio is similar to a debt service coverage ratio (DSCR). The primary difference is the latter is used for investment properties, whereas DTI is used for individual properties. The two categories of information required for the debt to income ratio are gross monthly income and monthly debt.
What does the Debt to Income Ratio Mean?
| DTI | Result | Explanation |
|---|---|---|
| 36% or less | DTI ratio is good | This is a favourable DTI ratio because it shows lenders that you have money saved over after all your monthly spending. |
| 37% - 50% | DTI ratio is OK | This is an average DTI ratio as lenders feel that you may not have enough money left over to meet your monthly payments. In general, the maximum DTI most lenders allow is 50%. |
| 51% or higher | DTI ratio is high | This is a high DTI ratio which may result in rejection by a majority of lenders. This does not mean that you will not be able to qualify for a loan. Lenders check many other factors such as credit scores, assets, and savings. |