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How to calculate debt-to-income ratio

To calculate debt-to-income ratio, first add up all your monthly debt payments. Separately, add up your total gross income or what you earn before taxes are taken out. Next, divide your debt by your gross monthly income to get your debt-to-income ratio.

1 Add up your monthly debts

The first step toward calculating your debt-to-income ratio is adding up all your monthly debt payments. For fixed-payment loans like rent, an auto loan or a personal loan, you will use your regular monthly payment. Use your minimum monthly payment for variable payments such as credit card payments or a home equity line of credit. Your monthly debts will include any debts . For your mortgage payment, you will calculate with the full PITI (principal, interest, taxes and insurance). This will be your regular monthly payment if you escrow your taxes and insurance. If you don’t escrow, your lender will likely take your annual tax and insurance payments, divide them by 12 and include them as part of your mortgage payment for purposes of DTI calculation. Calculator Here is an example of what it could look like after considering these monthly debts: Mortgage: $1,600 Auto loan: $300 Minimum credit card payments: $300 Student loan: $200 Total monthly debts: $2,400

2 Add up your monthly gross income

Next, you’ll want to add up your monthly gross income. Consider all of your income. When you apply for a loan, your lender will likely require documentation of your income. If you are a W-2 employee, documentation will likely come from your W-2 form and/or your last several pay stubs. If you are self-employed or have income from a side hustle, your lender will likely look at your business tax returns. If you have money coming in from a side hustle but don’t have a business tax return or other documentation, your lender may not allow you to use that income as part of your DTI calculation. If you have properties you rent out, you need to calculate that too. The mortgage payments on your rental properties are included as part of your monthly debts, but you may not be able to use all of the rental income as part of your income calculation. Many lenders will only allow you to count 75% of the monthly rent towards income. That leaves a buffer for maintenance and vacancies. Calculator Here is how those calculations could go: Monthly gross income from day job: $5,000 Side hustle monthly gross income: $1,000 Total monthly gross income: $6,000

3 Divide your monthly debts by your monthly gross income

For this example, you would divide your monthly debt payments ($2,400) by your total monthly gross income ($6,000). In this case, your total DTI would be 0.40, or 40 percent.

What is a good debt-to-income ratio

The higher your DTI, the riskier you appear to lenders. Each lender has different DTI standards you must meet to qualify for a loan, but most lenders use a 43 percent DTI as a benchmark. A DTI above 43 percent could make it more difficult for you to obtain a loan. In particular, this applies to qualified mortgages. In many cases, 43 percent is the highest DTI ratio a borrower can have and still be approved for a qualified mortgage. Typically, a DTI of 50 percent or more is concerning. You don’t have much extra money to spend each month, so you’ll have a harder time making , let alone other expenses. If your DTI is between 36 percent and 49 percent, it’s good, but there’s still room for improvement. You might want to consider lowering your DTI before applying for a loan. A DTI below 35 percent is good and manageable. It shows that you have enough money to take on new debt and pay it back on time. If an emergency came up, you most likely wouldn’t fall behind on payments. The requirements differ for each lender and the type of loan you take out. Your DTI for a mortgage might not be the same as your DTI for a personal loan.

Bottom line

Your DTI can make or break your chances at a loan. So, do your best to lower your DTI as much as possible before taking on new debt, like a new car loan. It will not only help you qualify for a loan but may also help you get a lower interest rate. You can also improve your DTI by lowering expenses to make higher debt payments, increasing your income or consolidating debts at a lower interest rate. SHARE: Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy. Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information.

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