Why You Should Care About Your DTI or Debt To Income Ratio
What Is DTI?
DTI, also known as Debt-to-Income Ratio or Debt vs. Income Percentage, demonstrates the relationship between the amount of debt you have and the amount of income you have. In simplest form, it's the amount of your income that pays your debt each month.
Types of DTI
There are two different DTI percentages used often:
1. Your Housing Debt-to-Income Ratio looks at only one category of debt: housing or mortgage-related debt payments due monthly. This number is often calculated by lenders to see what you qualify for when you ask for a mortgage loan. It makes sure that your lender can't qualify you for a $1M house if it's going to take 95% of your income to pay the loan (because the 5% you have left can't sustain all your other expenses)!
2. Your Overall or Total Debt-to-Income Ratio takes into account ALL debt, including housing, as it relates to your income.
Why Should I Care About My DTI?
Short answer? Financial Health and the Ability to Qualify for a Loan
A common indicator of financial health is having a 'manageable' amount of debt. This is indicated by a lower DTI percentage. If only 15% of your income goes towards debt on a monthly basis (for example) you're more likely to have flexibility in your budget and be able to save and spend with less stress. Things like buying groceries, paying your utility bill, and filling up the gas tank aren't as big of a deal if you don't have a staggering debt payment due each month as well. This also makes you less likely to be a risky borrower when you go to apply for a loan with a credit union or bank.
General Guidelines for DTI
If Total DTI is 45% or higher, it's likely difficult to make ends meet. Lowering debt or increasing income could be really helpful. (We know, easier said than done!) But these resources could help: Debt Relief Bundle, I Can't Make My Credit Card Minimum Payments - Now What?, or just visit our financial calculators page and poke around.
If Total DTI is between 30%-44%, you can probably manage to meet your expenses and financial needs most of the time. Of course, there's always room for improvement. 😉
If Total DTI is below 30%, it's likely that you're in a comfortable position regarding debt, with enough money left over for saving and spending as needed.
Some financial gurus advocate for 0% DTI - getting to a point where you're 100% debt-free so that all of your income can go towards your living expenses, savings, and other goals. If that's something you want to do and is realistic with your income level, more power to you! 😍
A caveat - if your income is extremely low, then DTI is not as helpful of a metric. If all of your income goes toward meeting basic needs- such as housing, utilities, transportation, and food - then any debt on top of that will make it extremely difficult for you to make ends meet, no matter what the amount is.
How Do I Calculate My DTI?
1. Figure out your monthly gross income.
This is the amount of money you make each month, before any taxes or deductions are taken out. This is not the same as your "take-home" pay.
2. Determine how much you pay towards debt every month.
Add up all minimum monthly payments for mortgage loans, auto loans, credit cards, student loans, personal loans, etc.
3. Divide the two numbers above.
Debt (#2 above) ÷ Income (#1 above) = a decimal number
4. Multiply that decimal number by 100.
Now you know your Debt vs. Income Percentage or DTI ratio!
DTI (Debt To Income) Ratio Example
Keyshawn has been working for a law firm for 6 years and is currently making $74,500 per year. Take a look at his calculations below:
Keyshawn's Monthly Gross Income: $6,208
Take the yearly salary of $74,500 and divide it by 12. Reminder: Gross Income is the amount you're paid before any deductions, such as taxes, are taken out.
Keyshawn's Monthly Debt Payments: $1,850
Mortgage: $1,000, Student Loan: $400, Auto Loan: $350, Credit Card: $100 (All of these are the minimum payments required, not taking into account any extra payments he chooses to make.)
His Debt-to-Income Ratio is calculated by dividing the monthly debt payments by the monthly gross income, and then multiplying by 100 to convert the decimal into a percentage:
Keyshawn's DTI: $1,850 ÷ $6,208 = .298 or 29.8%
DTI is a helpful metric for many people to know. Once you know what it is and how to calculate it, it can be a great idea to do the math once in a while to see how your DTI is trending over time. We hope this helps!
1 This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only. Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval. Membership is required.