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Your debt-to-income (DTI) ratio is the amount you owe in monthly debt payments compared to your income. This ratio is also often a determining factor when lenders are deciding whether to approve you for a loan since it helps lenders see if you can reasonably manage an additional payment.
If you’re wondering what your debt-to-income ratio is and what it means, here’s what you should know:
- What is debt-to-income ratio?
- How to calculate your debt-to-income ratio
- What are front-end ratios and back-end ratios in a DTI?
- What is a good debt-to-income ratio?
- Does my debt-to-income ratio affect my credit score?
- Can I reduce my DTI? Yes.
What is debt-to-income ratio?
When a lender is deciding whether to approve you for a loan, they’ll review your DTI ratio to see what your cash flow is compared to your monthly debt payments — such as your mortgage or rent, credit card payments, or car payments.
Lenders typically view borrowers with high DTI ratios as a greater risk. This is namely because it indicates that a large extent of your monthly income is already being used for other debt obligations — meaning you might not be able to fit a new payment comfortably into your budget.
Learn More: How to Get a Personal Loan
How to calculate your debt-to-income ratio
If you want to calculate your DTI ratio, follow these three simple steps:
1. Add up your total monthly debt payments
This should include your housing payments as well as any payments reported to the credit bureaus — for example:
- Mortgage or rent payments
- Auto loan payments
- Student loan payments
- Personal loan payments
- Minimum credit card payments
- Alimony or child support payments
So while your DTI ratio might seem low, you’ll need to consider your entire financial situation to fully understand how much you can reasonably spend on a new loan.
2. Calculate your monthly gross income
This is your monthly take-home pay before taxes and other deductions have been withheld.
3. Calculate your DTI ratio
Divide your total monthly debt payments by your monthly net income. To convert this into a percentage, multiply it by 100 — this number is your DTI ratio.
- Divide $1,600 by $5,000
- Multiply this number by 100 to equal a DTI ratio of 32%
The DTI ratio you’ll need to qualify for a loan will depend on the type of loan you get as well as the lender. For example, if you want to take out a personal loan, your DTI ratio should be no higher than 40% — though some lenders might require lower ratios than this.
If your DTI ratio seems to be in good shape and you want to apply for a personal loan, be sure to consider as many lenders as possible to find the right loan for you. Credible makes this easy — you can compare your prequalified rates from multiple lenders in two minutes.
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What are front-end ratios and back-end ratios in a DTI?
In some cases, lenders will look at both your front-end ratio and back-end ratio — mainly if you’re applying for a mortgage. Here’s how they work:
- Your front-end ratio (sometimes referred to as your housing ratio or mortgage-to-income ratio) calculates how much you pay toward housing expenses each month. For example, this might include mortgage payments, mortgage insurance, and property taxes. To find your front-end ratio, you’ll divide your total housing costs by your gross monthly income.
- Your back-end ratio refers to your overall DTI ratio. To calculate this, you’ll add up all of your monthly debt payments — including housing costs as well as other payments, such as credit card payments or student loan payments. You’ll then divide this by your gross monthly income.
Check Out: Personal Loan Calculator: See Your Payments On a Loan
What is a good debt-to-income ratio?
Lenders typically prefer to work with borrowers who have a low DTI ratio — this gives them more confidence in lending to you. In most cases, lenders want to see an overall DTI ratio no higher than 36%.
However, keep in mind that the highest your ratio can be to get approved can vary by the type of loan you’re applying for.
- For a personal loan, your DTI ratio should be no higher than 40%.
- For a private student loan or for student loan refinancing, your DTI ratio should be no higher than 40%.
- For a mortgage, your front-end ratio should be no higher than 28%, and your back-end ratio should be no higher than 36%. In some cases, you might be able to qualify for a mortgage with a DTI ratio as high as 43%.
- Credit score: You’ll typically need a good to excellent credit score to take out a personal loan — a good credit score is usually considered to be 700 or higher. There are also several lenders that offer personal loans for bad credit, but these loans tend to come with higher interest rates compared to good credit loans.
- Income: Lenders want to see that you can afford to pay back the loan. Some lenders have a minimum income requirement while others don’t — but in either case, you’ll likely have to provide proof of income.
Some lenders might also consider your savings and assets when assessing your DTI ratio. If you have a decent amount of savings or assets, they might be willing to accept a higher DTI ratio — though usually only up to 40%.
Learn More: Best Personal Loan Companies
Does my debt-to-income ratio affect my credit score?
Credit reporting agencies don’t keep track of your income, which means your debt-to-income ratio doesn’t affect your credit score.
However, keep in mind that there’s another ratio that will impact your credit — your credit utilization ratio. This is the amount you owe in revolving debt (such as credit cards or lines of credit) compared to your credit limits.
- Add up your balances on revolving lines of credit.
- Add up your total credit limits.
- Divide your total balance by your total credit limits to get your credit utilization ratio.
For example, say you have just one credit card with a $10,000 limit, and you’re carrying an $8,000 balance. In this case, you’d divide $8,000 by $10,000 for a credit utilization ratio of 80%.
Ideally, you should aim to keep your credit utilization at 30% or lower — this shows lenders that you can responsibly manage your debt load. Also note that reducing the amount of revolving debt you carry can help lower your DTI ratio.
Check Out: How to Pay Off Credit Card Debt Fast
Can I reduce my DTI? Yes.
Yes, there are several strategies that could help you reduce your DTI ratio. For example, if you focus on paying down your debt balances, you can also lower your DTI ratio.
Here are some potential ways to do this:
- Create a budget to track your spending. Keeping a close eye on your monthly spending can help you see where you might be able to trim expenses — for example, you might cut down on streaming subscriptions or start cooking at home to save on take-out meals. You can then put these extra savings toward any outstanding debt.
- Use the debt snowball method. With this method, you’ll focus on paying off your smallest debt first. Once this first debt is cleared, you’ll move on to the next-smallest debt — continuing until all of your outstanding debts are paid off. While the debt snowball method likely won’t save you a lot of money on interest, you’ll be able to quickly see your balances decreasing, which can be helpful if you’re motivated by small wins.
- Use the debt avalanche method. Another payoff strategy is the debt avalanche method. With this method, you’ll focus on repaying your debt with the highest interest rate first. After this debt is paid off, you’ll move on to the debt with the next-highest interest rate — continuing until everything is paid off. While it can take a while to see results with the debt avalanche method, it could help you save money on interest over time.
- Avoid taking on more debt. Taking on additional debt means you’ll be adding to your debt payments each month, which will increase your DTI ratio. But if you’re mindful about only applying for loans when you need them, you can avoid raising your DTI ratio unnecessarily. Avoiding new credit cards or lines of credit or using them for major purchases could also help you maintain your credit utilization ratio.
If you have reviewed your DTI ratio and decided to take out a personal loan, remember to consider as many lenders as possible to find the right loan for your needs.
This is easy with Credible: You can compare your prequalified rates from multiple lenders in two minutes — without affecting your credit score.
Ready to find your personal loan?
Credible makes it easy to find the right loan for you.
Find My Rate
Checking rates won’t affect your credit
