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What does debt to income (DTI) really mean?

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When lenders sit down to review a loan application, there’s one main question they ask: Is the borrower trust worthy enough to lend to? Many factors influence the lending decision, including your credit score, terms of the loan, employment history, collateral, and, your debt-to-income ratio (DTI).

Your DTI is a percentage calculated by dividing your monthly gross income with your monthly debt payments. Follow the steps below to discover your own DTI.

Total your monthly bills

Take some time and total up the general, recurring bills you pay each month, like:

  • Monthly rent or housing payment
  • Monthly child support or other marital debt
  • Auto loans, student loans or other monthly loan payments
  • Credit Card minimum monthly payments

Remember, payments like groceries, gas, parking, utilities, day care, cable, taxes (if not included in your mortgage payment) are generally not included in your debt to income calculation. However, when you sit down to create your budget, be sure to include those items in your expenses list.

Divide your total by your income

To get your ratio, divide the total of your monthly bills above by your pretax, gross monthly income. This calculation will result in a number that will reflect your DTI ratio as a percentage. For example, if the result of your calculation is 0.325, then your DTI is 32.5% when converted to a percentage.

What is considered a good DTI ratio? The lower your DTI ratio, the more flexibility you will have in your budget to save, give, make home repairs, travel, etc. Remember, the calculation uses your gross income, not your net income or take-home pay.

  • A debt to income ratio of 35% or less is considered good and debt should be manageable.
  • With a debt to income ratio of 36% to 45%, there may be opportunity to improve your debt structure. You might consider a smaller mortgage to make your debt more manageable.
  • A DTI of more than 45% indicates you may need to make some changes. A higher ratio means that you have little availability for funds to address unplanned expenses. This high ratio may affect your approval for a mortgage.