Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes towards payments for rent, mortgage, credit cards, or other debt. It is an important financial health factor that lenders consider when determining if they will lend you money. To calculate your DTI, you need to:
- Add up your monthly bills which may include:
- Monthly rent or house payment
- Monthly alimony or child support payments
- Student, auto, and other monthly loan payments
- Credit card monthly payments (use the minimum payment)
- Other debts
Note: Expenses like groceries, utilities, gas, and your taxes generally are not included.
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Divide the total by your gross monthly income, which is your income before taxes.
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The result is your DTI, which will be in the form of a percentage. The lower the DTI, the less risky you are to lenders.
For example, if your monthly debt equals $2,500 and your gross monthly income is $7,000, your DTI ratio is about 36 percent. Lenders typically say the ideal front-end ratio should be no more than 28 percent, and the back-end ratio, including all expenses, should be 36 percent or lower.
