How To Calculate Debt-To-Income Ratio | BiggerPockets Blog

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A proper understanding of how to calculate your debt-to-income ratio is crucial to your overall financial health. Rather than guessing and hoping for the best, this blog breaks down everything you need to know about the debt-to-income ratio.

What is the debt-to-income ratio?

debt-to-income ratio (DTI) is a financial measure that shows how well you manage to pay off debt in relation to your total income.

In short, it is the percentage of your total monthly income that goes towards paying off your monthly debts. Lenders use this to measure your creditworthiness and risk level, which affects whether you get loans and the interest rates you offer.

A lower DTI indicates stronger financial stability, which means that you are not overburdened with debt. On the contrary, a high DTI It may indicate financial stress and make it difficult to secure loans or desirable interest rates.

What is the DTI formula?

The debt-to-income ratio formula is pretty straightforward: Divide your total monthly debt payments by your total monthly income. From there multiply the number by 100 to convert it to a percentage.

Take, for example, a consumer who has $3,000 in monthly debt payments and $6,000 in monthly gross income. Here’s the debt ratio formula you can use:

• $3,000 / $6,000 = 0.5
• 0.5 x 100 = 50%.
• DTI = 50%

With this simple formula, calculating your DTI is something you can do at any time.

How to calculate the debt-to-income ratio

A few steps are involved in understanding how to calculate the debt-to-income ratio.

First, collect your monthly debt payments. This includes mortgage or rent payments, auto loans, student loans, credit card debt, and other recurring debts.

Next, determine your gross monthly income. This is your income before taxes or other deductions.

Finally, as above, divide your total monthly debt by your gross monthly income, then multiply the result by 100 to get your DTI as a percentage.

Tip: While calculating your debt-to-income ratio, make sure you use accurate and up-to-date numbers.

How does DTI affect my ability to get a loan?

When comparing DTIs, lower is always better. A lower number increases the likelihood of a loan being approved at the lowest possible rate.

The lower your DTI, the better chance you have of managing your monthly debt loan comfortably on the income you earn.

In general, a DTI of 36% or less is seen as favorable. On the other hand, a high DTI, usually defined as above 43%, indicates that you are in significant debt relative to your income. This can raise red flags for mortgage lenders, making them more reluctant to approve your loan.

What is a good debt-to-income ratio?

The word “good” in the debt-to-income ratio varies from lender to lender. In general, a good DTI is less than 36%. A number in this range shows that you have a manageable balance between debt and income.

Taking this a step further, most lenders closely examine expenses within your DTI ratio (front and back DTI). For example, if you have a DTI of 36%, they might work on the assumption that no more than 28% of your gross monthly income should be allocated to housing expenses. The remaining 8% must cover other types of debt, such as car payments, credit card payments, personal loans, and student loans.

It is important to note that while a lower DTI improves your odds of obtaining a competitively priced loan, it is only one factor that lenders consider. They also look at your credit score, Balance historycredit report, credit utilization ratio, employment history, and bank account balances.

What is the debt-to-income ratio?

The debt-to-income ratio is a subset of your total DTI. It represents the percentage of gross monthly income that goes to monthly housing costs such as mortgage payments, property taxes, homeowners insurance, and any applicable homeowners association dues. An anterior lower DTI generally indicates a better financial balance.

What is the debt-to-income ratio?

The debt-to-income ratio is a broader measure of your financial obligations. In addition to housing expenses, it includes all of your monthly recurring debt obligations such as car loans, student loans, credit cards, and child support. All loan payments are taken into account. Depending on the type of loan, the debt is likely to be paid off at some point, improving your ratio.

Your total debt obligations are a percentage of your total monthly income. A lower back DTI is usually more favorable in the eyes of the lender.

Now that you know how to calculate your debt-to-income ratio, you can track your overall financial health more accurately and steadily.

Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.