Debt-to-Income (DTI) Ratio Calculator

What is a debt-to-income ratio, and what does it mean?

Divide your monthly debt payments by your monthly gross income to get a debt-to-income (DTI) ratio. Lenders use the ratio, which is represented as a percentage, to evaluate how effectively you manage monthly obligations and if you can afford to repay a loan.
Lenders often regard customers with higher DTI percentages as riskier borrowers since they may have difficulty repaying their loan if they face financial difficulties.
Add together all of your monthly debts — rent or mortgage payments, school loans, personal loans, vehicle loans, credit card payments, child support, alimony, and so on – and divide the total by your monthly income to get your debt-to-income ratio.

What variables go into calculating a DTI ratio?

A DTI ratio is made up of two parts: a front-end ratio and a back-end ratio, which are used by mortgage lenders. Here's a look at each one and how it's calculated:
The front-end ratio, also known as the housing ratio, indicates what proportion of your monthly gross income goes toward housing costs such as your monthly mortgage payment, property taxes, homeowners insurance, and homeowners association dues.
The back-end ratio indicates how much of your income is required to pay off all of your monthly debt commitments, as well as your mortgage and housing costs. Credit card payments, auto loans, child support, school loans, and any other revolving debt that appears on your credit report fall into this category.

What is the formula for calculating the debt-to-income ratio?

For determining your DTI ratio, use this easy two-step calculation.
Add all of your monthly debts together. These payments may include the following:

• 1 : Payment of a mortgage or rent on a monthly basis
• 2 : Payments using a credit card must be made in full
• 3 : Payments using a credit card must be made in full.
• 4 : Payments on a car, a student loan, or a personal loan
• 5 : Child support or alimony payments are made on a monthly basis.
• 6 : Payments on any other debts that appear on your credit report

Subtract your monthly debts from your monthly gross income (your take-home pay before taxes and other monthly deductions).
The DTI ratio is calculated by converting the number into a percentage.
Other monthly expenditures and financial responsibilities are not included in this computation, such as utilities, food, insurance premiums, healthcare costs, childcare, and so on. These budget elements will not be considered by your lender when determining how much money to give you. Keep in mind that just because you qualify for a $300,000 mortgage doesn't imply you can afford the monthly payment when your whole budget is taken into account.

What does a good debt-to-income ratio look like?

Lenders generally recommend a front-end ratio of no more than 28 percent and a back-end ratio of 36 percent or less, including all expenditures. In fact, lenders may accept greater ratios based on your credit score, savings, assets, and down payment, as well as the kind of loan you're asking for.
Lenders currently accept a DTI ratio of up to 50% for conventional loans guaranteed by Fannie Mae and Freddie Mac. That implies you're spending half of your monthly income on housing and recurrent monthly loan payments.

What effect does my debt-to-income ratio have on my credit?

Because credit agencies do not include your income when calculating your credit score, your DTI ratio has minimal impact on your final score. Borrowers with a high DTI ratio, on the other hand, may have a high credit usage ratio, which accounts for 30% of your credit score.
The outstanding amount on your credit accounts in proportion to your maximum credit limit is known as the credit usage ratio. Your credit usage ratio is 50% if you have a credit card with a $2,000 limit and a $1,000 debt. When applying for a mortgage, you should aim to maintain your credit usage percentage below 30%.
Lowering your credit usage ratio can improve your credit score while also lowering your DTI ratio since you'll be paying off more debt.

How to get your debt-to-income ratio down to a more manageable level ?

Focus on paying off debt with these four strategies to bring your DTI ratio under control. Create a budget to keep track of your spending and eliminate needless purchases so you can put more money toward paying off your debt. Make a list of all of your expenditures, large and little, so you can set aside money to pay down your debt.
Make a strategy for paying off your debts. The snowball and avalanche techniques are two common debt-reduction strategies. The snowball approach is paying off your smallest credit card debt first, while making minimal payments on your remaining debts. After you've paid off the lowest amount, go on to the next smallest, and so on.
The avalanche approach, also known as the ladder method, on the other hand, entails addressing accounts with greater interest rates. After paying off a higher-interest account, you go on to the next account with the second-highest rate, and so on. The important thing is to adhere to your strategy, no matter which route you choose. The debt payback calculator on Bankrate.com may assist you.
Reduce your debt to a more manageable level. Look for methods to reduce your credit card rates if you have high-interest credit cards. To begin, contact your credit card provider to check if your interest rate may be lowered. If your account is in excellent standing and you pay your bills on time, you may have greater luck going this way. You may find that consolidating your credit card debt by moving high-interest balances to an existing or new card with a lower rate is a preferable option in certain instances. Another option to combine high-interest debt into a loan with a reduced interest rate and one monthly payment to the same business is to take out a personal loan.
Don't take on any additional debt. Don't use your credit cards to make big expenditures or take out additional loans to make major purchases. This is particularly true before and throughout the purchase of a house. Taking on additional loans will not only increase your DTI ratio, but it will also harm your credit score. Similarly, making too many credit queries may decrease your score. Maintain a laser-like concentration on debt repayment without adding to the issue.