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When applying for a loan, you’ll need to show lenders that you’re a worthy borrower, which means meeting their requirements. One of those requirements is having a low enough debt-to-income ratio (DTI). Your DTI represents how much of your income goes toward debt payments, which gives lenders an idea of whether you can take on more debt.
Learn more about DTI to improve your chances of getting a loan.
- Why is DTI important?
- How to calculate DTI
- What’s a good DTI?
- How to reduce your DTI
- Front-end ratios vs. back-end ratios
- Does your DTI affect your credit?
Why is your debt-to-income ratio important?
Your DTI is used by lenders to determine whether to extend you a loan and how much you can borrow. This is because it measures your free cash flow (before taxes) each month, and indicates how much debt you carry relative to your income. But it’s also a quick measure of your own financial health.
The lower your DTI, the better, since it suggests you have money left over each month to put toward savings (and additional debt). If your DTI is considered high, lenders see this as a red flag and could deny your loan. Different lenders have different specifications for what makes a DTI high.
How to calculate your debt-to-income ratio
Your DTI is unique to you and represents the percentage of your monthly income that goes toward obligatory monthly debt payments.
Calculating your DTI is fairly simple and can be done in these three steps:
- Figure out your gross monthly income: You can find your gross monthly income by adding together all your monthly income before taxes are taken out. This could include your salary, hourly wages, tips, and any additional sources of income you have.
- Figure out your monthly debt burden: Add your minimum monthly debt payments together, plus your rent or mortgage payment. Include minimum credit card, student loan, auto loan, and any other monthly payments.
- Divide your minimum debt payments by your monthly income: You calculate your DTI by dividing the number you got in step 2 by the number you got in step 1. To convert it to a percentage, multiply the answer by 100.Formula: DTI = (monthly debt burden / gross monthly income) x 100.
For example, if your monthly pretax income is $5,000 and your monthly debt burden is $1,500, you would plug these numbers into the DTI formula like this:
($1,500 / $5,000) = 0.3 x 100 = 30%
In this example, your debt-to-income ratio equals 30%.
What’s a good debt-to-income ratio?
A good DTI can vary between lenders and may be dependent on what type of loan you’re applying for. But in general, a DTI below 36% is considered good, as it suggests you won’t be overwhelmed by increasing your debt.
Here are some examples of maximum DTIs by lender for different types of loans:
- Fannie Mae (mortgage): 36%
- Freddie Mac Home Possible (mortgage): 43%
- VA loan (mortgage): 41%
- Upstart (personal loan): 45% for residents of Connecticut, Maryland, New York, or Vermont; 50% for all other states
How to reduce your DTI
If your debt-to-income ratio is high, working to lower it can improve your chance of securing a loan. To lower your DTI:
- Pay off debt: Focus on high-interest debt first to make the biggest impact.
- Increase your income: If you have the time, consider a part-time job or side business that pads your monthly income.
- Refinance your loans: If you refinance loans with a lender that offers a lower payment than what you currently have, you’ll reduce your DTI. But note that if you extend the repayment period, you may end up paying more in interest.
- Consolidate your debt: Consolidating multiple debts into one loan can reduce your interest rate or extend your repayment term — either of which could lower your monthly payment. Plus, managing one loan is usually easier than managing several.
Front-end ratios vs. back-end ratios
If you’re considering a mortgage, it’s important to know the difference between front-end ratios and back-end ratios:
- Front-end ratio: A front-end ratio only considers your housing expenses but not your overall debt. Housing expenses can include mortgage payments, insurance premiums, property taxes, and HOA fees, among others.
- Back-end ratio: A back-end ratio considers your housing expenses plus monthly debt obligations.
Does your debt-to-income ratio affect your credit score?
Although your debt-to-income ratio is a factor in determining whether a lender will approve a loan, it doesn’t have a direct impact on your credit score. However, a high credit utilization ratio does impact your credit.
If you have a high DTI, you may also have a high credit utilization ratio, which is the percentage of available credit you’re using. So even if your minimum debt payments aren’t excessive, you could still be dinged by using too much credit. This is because potential lenders want to know that you’re able to use credit responsibly, which generally includes not using all of the credit available to you.
| Lender | Fixed rates | Loan amounts | Check rates |
|---|---|---|---|
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 9.95% - 35.99% APR | $2,000 to $35,000** | |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 11.79% - 20.84% APR | $10,000 to $50,000 | |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 8.99% - 35.99% APR | $2,000 to $50,000 | |
|
|||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 7.99% - 24.99% APR | $2,500 - $40,000 | |
|
|||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 11.72% - 24.67% APR | $3,000 to $40,000 | |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 9.57% - 35.99% APR | $1,000 to $40,000 | |
|
|||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 7.49% - 25.49% APR with autopay | $5,000 to $100,000 | |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 18.0% - 35.99% APR | $1,500 to $20,000 | |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 8.49% - 17.99% APR | $600 to $50,000 (depending on loan term) | |
|
|||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 14.3% - 35.99% APR | $3,500 to $40,000 | |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 8.99% - 25.81% APR10 | $5,000 to $100,000 | |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 11.69% - 35.99% APR7 | $1,000 to $50,000 | |
|
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Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 8.49% - 35.99% APR | $1,000 to $50,000 | |
|
|||
Credible Rating
Credible lender ratings are evaluated by our editorial team with the help of our loan operations team. The rating criteria for lenders encompass 78 data points spanning interest rates, loan terms, eligibility requirement transparency, repayment options, fees, discounts, customer service, cosigner options, and more. Read our full methodology.
| 6.4% - 35.99% APR4 | $1,000 to $50,0005 | |
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