How to Calculate Your Debt-to-Income Ratio

By Matt Frankel | Updated March 25, 2022
reading time 6 min read
Woman standing in her apartment and writing down notes to calculate her debt-to-income ratio.

When you apply for a loan, whether it’s a mortgage, auto loan, or home improvement loan, your lender may need more than your word that you can pay them back. To make sure they can trust you to pay back the loan amount and interest, your lender will review details about you and your financial standing before approval. The details a lender will want to see can vary, but they’ll usually want to review your credit report, credit history, income, assets, and your debt-to-income ratio, or DTI

Lenders place a lot of emphasis on your DTI ratio because it helps them understand the potential risk you are when they lend you money. Before you apply for a loan, learn more about what a DTI ratio is and how to calculate it. 

What is the debt-to-income ratio?

A DTI ratio is a percentage that lenders calculate to understand how much of your money you use to pay for debt. “Your money” means your total monthly earnings before taxes, and “debt” in this case means your rent, loan payments, and credit card payments. For example, if your DTI ratio is 20%, it means that you use 20% of your total monthly income to make your debt payments each month. 

What is a good debt-to-income ratio?

Similar to a credit score, debt-to-income ratios fall on a spectrum, with some numbers being more preferable than others. To determine whether you have a good debt-to-income ratio or not, follow the 28/36 rule. While some lenders determine DTI based on proprietary configurations, the 28/36 rule is a popular tactic that many use to calculate the amount of debt an individual or household should have.

Basically, this rule states that a person or family should spend no more than 28% of its total pre-tax monthly income on all housing expenses and a maximum of 36% on all debt payments, including housing expenses and other debt like auto loan and credit card payments.

In other words, lenders generally want borrowers to have a DTI ratio of 36% or less, with a maximum of 28% of that amount designated for mortgage or rent payments. The lower your debt-to-income ratio is, the better, because you’re more likely to get the best interest rates and terms.

The maximum DTI ratio a lender can accept varies depending on who you’re working with and the type of loan you’re trying to get. And it has become more flexible in recent years. Mortgage lenders regularly accept DTI ratios as high as 45%. In some cases a lender’s max DTI for a mortgage loan could be more than 50%.

However, it’s important to note that a high DTI ratio signals to lenders that a borrower might already have too much debt compared to their monthly income and likely won’t be able to afford a new loan payment.

Does debt-to-income ratio affect your credit score?

No, your DTI ratio does not affect your credit score. However, the credit-utilization ratio—sometimes called debt-to-credit ratio—does affect your credit score. Typically, your debt-to credit ratio refers to the amount you owe across all your credit accounts compared to the credit that is available to you. 

Most financial experts advise keeping your credit-utilization ratio no higher than 30% of your credit limit—the lower this number is, the better. In fact, the average consumer with a top-tier FICO® Credit Score uses just 4% of their available credit. 

How to calculate debt-to-income ratio?

Since your debt-to-income ratio is basically a comparison of the amount of money you put toward debt each month and your monthly income, you can calculate your DTI with three easy steps.

  1. Add it up. Start by adding up all of your monthly debt payments. If you have a side hustle in addition to your main job, be sure to add those two together to get your total monthly income. 

    Here are some monthly bills you may want to include:

    • Monthly rent or mortgage payment
    • Student loan, auto loan, and other monthly loan payments
    • Monthly alimony or child support payments
    • Minimum monthly credit card payments 
    • Any other recurring debt you may have 

      Pro tip: Other recurring expenses such as groceries, utilities, and gas are not usually included. As a general rule, if it isn’t on your credit report, it isn’t included.

  1. Divide it. Divide your total monthly debt by your gross monthly income (aka your total monthly income before taxes). 

    For example, if your monthly debt payments are $3,200, you’d divide that by your total monthly gross income, $8,000. In this case, your total DTI would be 0.40.

  2. Convert it. Since your DTI will initially come out as a decimal, you just need to convert it into a percentage for the final result. Do that by multiplying the result by 100 or by moving the decimal two places to the right. For the example above, 0.40 would become 40%.

What to do if your DTI is too high

If you have a DTI higher than 36%, don’t panic. But you may want to consider taking steps to lower it. If you don’t know where to start, don’t worry. You have several strategies to choose from.

Reorganize your debt

If you have a lot of high-interest debt, one option is to reorganize it. In case you don’t know, there are ways you can restructure it to help you pay it down faster, which can help you lower your DTI ratio. We’ve listed some common options for you to consider. 

  • Debt consolidation loan. A debt consolidation loan is a type of personal loan. With this method, you can combine several high-interest debts into one and make a single payment instead of several. That makes your debt more manageable and could help you save money. To get there, you first apply for a debt consolidation loan from a lender. If you’re approved—hopefully for a loan with a lower interest rate—you can pay off your high-interest debts with the new loan and make one payment to your new lender.
  • Debt management plan. If you’re having a hard time making your monthly credit card payments, you may want to consider getting a debt management plan from a nonprofit credit counseling agency. With this method, you can combine your credit card payments into a single payment to the agency. 
  • Home equity line of credit (HELOC). A HELOC is a line of credit from a financial institution that gives you a revolving credit line to use for big purchases or to combine higher-interest rate debt from other loans. Since lenders require borrowers to use their homes as collateral to back up and “secure” the loan, they typically have a lower interest rate compared to other types of loans. Just be careful before you commit to this method. This is a form of home loan, so if you’re unable to repay the lender, they can take your home as payment for the debt.
  • Balance transfer credit card. With a balance transfer credit card, you can possibly save money by transferring a current credit card balance to a new credit card that has either no or a low interest rate for a promotional period. Usually, lenders offer credit cards with an introductory 0% interest rate period for at least a year.

Pay down your debt

We know it’s easier said than done, but one of the best ways to lower your DTI ratio is by paying down your debt. To do so, write down a list of all your expenses and analyze them. Then, identify which expenses you can cut to help free up money you can use to pay down your debt. If you’re unsure about what debt to tackle first, consider whether the snowball or avalanche debt payment method will work best for you.

Put off big purchases

When you have a high DTI, making big purchases on your credit card or taking on more debt with a new loan for a big expense can add to the debt. Not only does a big expense or loan for one increase your DTI ratio, but it can also hurt your credit score too. If you want to get your DTI ratio under control, avoid making big purchases with your credit card and focus on paying down your debt instead.

Boost your income

Sometimes, we can all use a little extra money. If you have a high DTI ratio and need to lower it, increasing your income will certainly help. With the extra money you earn, you’ll be able to comfortably contribute more to your monthly debt payments, which will help you reduce your DTI.

It’s your turn

Now that you understand what a debt-to-income ratio is, why it’s important, and how to calculate it, you can make a more informed decision about whether applying for a loan or other type of credit is the right move for you. If your DTI is high, don’t be discouraged! Take the time to work on a plan to reduce your debt or increase your income. By doing either, you can lower your DTI over time, which could help you improve your chances of qualifying for a loan in the future.

This content is general in nature and is provided for informational purposes only. Upstart is not a financial advisor and does not offer financial planning services. This content may contain references to products and services offered through Upstart’s credit marketplace.

About the Author

Matt Frankel

Matt Frankel is a Certified Financial Planner® whose mission is to create a more financially informed world. Matt has had more than 10,000 published articles throughout his career, and won a 2017 SABEW Best in Business award for his coverage of the tax reform legislation. His work has been featured in The Motley Fool, CNBC, MSNBC, Nasdaq, USA Today, and many other outlets. He can regularly be seen on Motley Fool Live, and he has made guest appearances on NPR, BBC, Cheddar News, just to name a few. Matt is based in the Columbia, South Carolina, area where he lives with his wife Kathy, two amazing kids, and two high-maintenance dogs.

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