Debt-to-income ratio (DTI) reflects how much of your gross monthly income is used towards your monthly debt payments. To calculate your DTI and check your financial health, just enter all your debt payments and annual income.
The debt-to-income ratio (DTI) measures the condition of your financial health. You can get it by using a simple formula.
DTI ratio - Total monthly debt payments / Monthly gross income
Your monthly debt obligations include student loan payments, mortgage payments, personal loans, credit card debts, car loan payments, alimony, etc.
The debt-to-income ratio is usually expressed as a percentage. A high DTI ratio indicates poor financial health.
You should use our DTI ratio calculator in the following circumstances:
Lenders use the DTI ratio to determine your loan eligibility. When you have a high debt to income ratio, lenders consider you as a risky borrower.
A lender’s most common question is: how will you repay the new loan if you can’t manage your recurring monthly debt payments?
Your loan applications will get rejected.
You will have to pay higher interest rates on the loans.
Front-end ratio - It denotes the percentage of your monthly gross income used to cover your housing expenses.
What you can include in the housing expenses
The front-end ratio is also known as the housing ratio.
Back-end ratio - It denotes the percentage of your monthly gross income used to cover your monthly expenses.
What you can include in your monthly expenses
Lenders consider a good debt to income ratio to be when:
Your front-end ratio is 28%
Your back-end ratio is 36%
Anything above that is a red flag for lenders. It’s not that you won’t qualify for any loan. When you apply for a home loan, mortgage lenders will look at several factors apart from your DTI ratio. These are:
To lower your DTI ratio, focus on paying off your debts. Here are some tips you can use to do just that:
The DTI ratio does not have a direct connection to your credit score. However, a high DTI ratio implies that you may have a high credit utilization ratio.
The credit utilization ratio makes up 30% of your credit score. A high credit utilization ratio drops your credit score. The ideal credit utilization ratio is 30%.
The credit utilization ratio is the percentage of the available credit used by you. For example, if your credit limit is $1000 and your outstanding balance is $700, your credit utilization ratio is 70%, which is pretty high.
When you pay down your debts, the outstanding balance on your credit cards also goes down, which helps lower your credit utilization ratio. It helps to boost your credit score.
To lower your debt to income ratio, you have to either pay down debts or increase your income significantly. While it is not always possible to increase your income, you can pay off your debts through credit card debt relief programs. That will help to reduce your total owed amount, which affects your credit score.
When your total debt amount is low, your credit score becomes high.