Credible takeaways
- Your debt-to-income ratio (DTI) measures how much debt you owe relative to your income and is a general indicator of your financial health.
- Your DTI can affect your ability to qualify for personal loans and other forms of credit.
- Personal loan lenders generally prefer a DTI of less than 36%, while mortgage lenders prefer a DTI under 43%.
- Calculate your DTI by dividing your total monthly debt payments by your gross monthly income.
If it seems like your budget is smaller than it should be after you take care of monthly debt payments, the reason might be your debt-to-income ratio (DTI). DTI isn’t just an abstract number hidden inside paychecks and bank statements. It’s an indicator of your financial well-being and plays an important role in your ability to qualify for personal loans, mortgages, and other forms of credit.
Understanding DTI, and the ways that debt-to-income ratio requirements affect credit decisions by lenders, can help you manage your finances more effectively.
Debt-to-income ratio (DTI) and what it means
Your DTI measures how much of your pre-tax monthly income, as a percentage, goes toward debt payments. In general, DTI is like a golf score — the lower, the better. It’s relevant because:
- As a person: The higher your DTI, the less money you have to save or spend in other areas and the less flexibility you have in your budget.
- As a credit user: Your DTI is one factor that lenders use to assess your viability as a borrower, from personal loans to mortgages. Although DTI doesn’t have a direct effect on your credit score, the amount of debt you owe does — and a high DTI could mean you have a high amount of debt.
Your DTI matters to lenders when you apply for credit. DTI matters to you because it can affect your chances of qualifying and the interest rate you might be offered. Interest rate plus any upfront fees, expressed as the annual percentage rate (APR), represents the cost of borrowing money.
How to calculate debt-to-income ratio
Though most lenders consider your DTI when you apply for credit, they don’t all calculate it the same way. Generally speaking, mortgage lenders consider your mortgage or rent payment when assessing DTI. Personal loan lenders, however, may not.
- Add your monthly debt payments. Include payments on your car loans, student loans, personal loans, minimum credit card payments, and other debt payments. If applying for a mortgage, you’ll need to include your rent or mortgage payment as well.
- Calculate your gross monthly income. Gross income, or pre-tax income, is your monthly pay before taxes and deductions. Add up all your income sources if you have more than one.
- Divide your total monthly debt payments by your gross monthly income.
- Multiply that number by 100 to get a percentage.
For example, let’s say you’re applying for a new mortgage and want to calculate your DTI:
- You have an existing $2,500 mortgage, a $200 student loan payment, and $300 worth of minimum credit card payments due each month. Your total monthly debt payments add up to $3,000.
- Your full-time job pays you $6,000 per month before taxes. You also earn an extra $2,000 per month from a second job on the weekends. In total, your gross monthly income is $8,000 per month.
- You would divide $3,000 by $8,000, which equals 0.375.
- You would multiply 0.375 by 100 to get 37.5%, your debt-to-income ratio.
Related: Ways To Pay Off Debt Fast
Debt-to-income ratio calculator
If math wasn’t your best subject in school, don’t worry. Some bank and credit union websites have an online DTI calculator, or you could just use the DTI calculator below.
What is a good debt-to-income ratio?
You may think you have a good DTI if you’re able to stay afloat financially. When you’re borrowing money, however, the lender will be the judge of what qualifies as a good debt-to-income ratio.
No one’s financial situation is exactly the same, but a DTI in the 30% range or lower would generally be considered good. However, specific DTI requirements vary by lender and loan type.
Debt-to-income ratio requirements
Although exact DTI requirements vary by lender, all lenders prefer that the number is low. From a lender’s perspective, borrowers with lower DTIs are less risky to work with. Lenders want to know that you’re not overextending yourself by putting too much of your income toward debt.
- Debt-to-income ratio for personal loans — 36% or lower: If you're seeking a personal loan, lenders generally prefer a DTI of less than 36%. For unsecured loans, like personal loans, you typically need a lower DTI than you would for a mortgage. A DTI below 36%, along with a good credit score and stable income, can help you qualify for lower APRs.
- Debt-to-income ratio for mortgages — 43% or lower: For mortgages, lenders tend to prefer a DTI under 43%. Generally, mortgage lenders are a little more flexible. Some lenders may consider a higher DTI, depending on your credit score and other factors. In part, this is because a mortgage is a secured loan, which means that if you default on the mortgage, the lender can foreclose on your home to recoup its losses.
A high DTI could signal that your financial situation is vulnerable, or that you’re unable to afford another loan. Even if a lender is willing to approve your loan with a high DTI, it may raise your rate to compensate for the perceived risk.
On the other hand, having a lower DTI could mean you’re more likely to qualify for a loan — and more likely to get a lower APR. If you know your DTI ahead of time, you can take steps to lower it, if needed, which could save you a lot of money on a mortgage or a personal loan.
Tip
Some personal loan lenders, like Upstart, will consider a DTI up to 50%.
It's best to prequalify before applying to see what rates and terms you may be approved for. Prequalification won't hurt your credit, but it's also not an offer of credit. And when you formally apply for a loan, the lender typically conducts a hard credit pull, which could temporarily ding your score.
How to improve your debt-to-income ratio
Because your DTI depends on two factors, there are two ways of lowering your DTI: decrease your monthly debt payments, or increase your income. (Though you could do both.)
Pay off debt to reduce DTI
Paying off debt can take time, especially if you have a lot of high-interest debt. But it doesn’t have to. If you can qualify for a debt consolidation loan or 0% balance transfer credit card, you could potentially reduce your monthly payments, thereby reducing your DTI.
You’d need to qualify for either loan first, but it could be a good move if you want to lower your DTI fast (perhaps you’re buying a home within the next six months). Consolidating high-interest debt with a personal loan is an especially good option if you’re paying off credit card debt. Not only could you lower monthly payments (and your DTI), but you could also improve your credit score.
Good to know
By using an installment loan (like a personal loan) to pay off your cards, you reduce your credit utilization. Using less of your available credit typically translates to a higher credit score.
Alternatively, you could employ one of two popular debt repayment strategies to pay off debt: the snowball method and the avalanche method.
- Debt snowball method: This strategy has you pay off your smallest debt first while making minimum payments on all other debts. When you finish paying off your smallest debt, you apply the previous debt’s monthly payment to the next-smallest debt, and so on. This strategy may keep you motivated with quicker wins upfront, but isn’t typically the fastest way to pay off debt.
- Debt avalanche method: This strategy has you pay off your highest-interest debt first while making minimum payments on everything else. When you finish paying off your highest-interest debt, you prioritize the debt with the next-highest rate, and so on. Using this strategy may take longer to pay off that first account, but it can actually help you pay off debt faster, saving you money on interest.
Let’s say you use one of these debt paydown methods to eliminate all of your credit card debt, and your total debt payments shrink from $2,000 to $1,200 per month. If you earn $5,000 per month before taxes, your DTI would drop from 40% to 24%.
Increase income to reduce DTI
The other way to lower your DTI is to earn more money, which is certainly easier said than done. But there are some ways you may be able to boost your income and lower your DTI, including:
- Negotiate a raise: If it’s been a while since you got a raise, do some research to make sure you’re receiving fair pay — then present your request along with compelling data and evidence.
- Earn rental income: If you have a garage apartment, in-law suite, or even an empty bedroom in your house, you may be able to rent it out for supplemental monthly income.
- Start a side hustle: Both product-based and service-based businesses make great side hustles. You’ll need an in-demand skill, a customer base, and a little bit of time.
Say you’re able to earn an extra $2,000 per month between renting out a bedroom and taking on a side hustle. Your income from the previous example would jump from $5,000 to $7,000. With monthly debt payments of $2,000, your DTI would drop from 40% to just over 29%.
Debt-to-income ratio and credit score
Although debt-to-income ratio doesn’t directly affect your credit score, debt itself does factor into various credit scoring models. For example:
- FICO score: Your FICO score’s “amounts owed” category accounts for 30% of your overall score. Only payment history (35%) accounts for a larger share of your FICO score.
- VantageScore: Balances, or the amounts owed on all your credit accounts, account for 11% of the VantageScore 3.0 scoring model and 6% of the VantageScore 4.0 model.
The effects of debt will probably be less noticeable in your VantageScore than in your FICO score. However, because FICO scores are the most commonly used credit scoring model in the United States, the amount of debt you owe is likely to carry more weight in lending decisions.
How to consolidate debt with a high DTI
Consolidating debt can benefit your finances in several ways. Not only can it streamline debt payoff, it can also save you money.
Debt consolidation requires getting a new loan to pay off your existing debts. But if your DTI is over 45%, you might not qualify for a debt consolidation loan. Fortunately, there are a few ways to make consolidating debt with a high DTI easier:
- Take out a secured debt consolidation loan: Secured loans require you to put up collateral, so they’re generally easier to qualify for than unsecured loans. As long as you’re comfortable using an asset as collateral, like your house or car, consider using a secured personal loan or a home equity loan to consolidate your debt. If you miss payments, however, the lender can take your collateral.
- Apply with a cosigner: Applying with a cosigner can help you qualify for a loan if they have good credit and a low DTI. A cosigner shares responsibility for the loan; any late payments you make could ding their credit, and if you default, they'd have to take over payments.
- Focus on lowering your DTI before applying for a new loan: If you can’t qualify for an affordable loan, it may be worth paying off some of your debt first. This can lower your DTI and make it easier to qualify for a debt consolidation loan, which can then accelerate your debt payoff progress.
- Use a balance transfer credit card: If you’re confident you can pay off your debt within a relatively short period of time, using a balance transfer credit card can be a smart way to do it. Some cards offer a 0% APR introductory offer on balance transfers, usually for 6 to 21 months. If you can pay off your debt within the introductory period, you can avoid paying interest. However, the card’s regular APR takes effect after the introductory offer expires.
Important
You may also have to pay a balance transfer fee, which often ranges from 3% to 5% of the amount being transferred.
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FAQ
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