What is a Debt-to-Income (DTI) Ratio and How Do I Calculate DTI?

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What we’ll cover:

  • What a debt-to-income ratio is and how it can affect you
  • The difference between a front-end and back-end DTI 
  • The significance of the 28/36 Rule
  • DTI requirements for different types of loans

If someone told you your debt-to-income ratio was 34 percent, would you have any idea what they meant? 

If you wouldn't, you're not alone. 

Your debt-to-income ratio, expressed as a percentage, is the number you get when you take all your monthly debts and divide it by your gross monthly income (that is, your income before any deductions). 

Your debt-to-income ratio is an important number – right up there with your credit score – because of what it compares: the percentage of debt you’re carrying against your income. One can argue that your DTI is a pillar of financial health: a number that shows how much control – or lack thereof – you have over your debts.

You want this number to be low – for when you apply for a new line of credit, a personal loan or a mortgage, or for when you want to boast about it to your friends and family, if you’re into that sort of thing. 

Whether you have a high debt-to-income ratio or a low debt-to-income ratio, we break down what you need to know about this all-important number. 

Front-end debt-to-income ratio

Yes, there is more than one type of debt-to-income ratio. 

The first we’ll cover is the front-end debt-to-income ratio. 

A front-end ratio shows how much of your pre-tax income goes toward both a mortgage payment and other housing expenses, like property taxes and insurance. 

Lenders look for front-end DTI to be at or below 28 percent; a percentage higher than that indicates to lenders that you could be struggling to live within your means or make regular payments on your debt. 

Something to be aware of is the 28/36 Rule, which lenders and creditors use to figure out how much money you can borrow.

Back-end debt-to-income ratio

A back-end ratio is the most common type of DTI: your monthly recurring debts divided by your monthly gross income. Most lenders like to see DTI ratios at or below 43 percent. We go into more detail about the back-end ratio in the next section. 

How to calculate debt-to-income ratio

First, you’ll need to take inventory of your debts.

In order to calculate your debt-to-income ratio (also known as your back-end DTI) you’ll need to total all of your monthly debts, which could include: 

  • Mortgage or rent payment
  • Credit card payments
  • Auto loan payments
  • Student loan payments
  • Utility bills
  • Cable/internet bills
  • Tuition payments
  • Insurance payments
  • Out-of-pocket transportation costs
  • Groceries
  • Allowances given
  • Child support or alimony payments

Of course, this is not an exhaustive list, but you get the point – be thorough in tallying your monthly debt payments. You don’t want to miss anything. If you do, your debt-to-income ratio won’t be an accurate reflection of your financial standing. And that can be misleading to both you and a lender.  

Now, do the following. Take the total of your recurring monthly debts from the list above. Divide that number by your gross monthly income. That new number is your debt-to-income ratio. It’s expressed as a percentage. 

For example, if your total monthly debts add up to $4,000 and your monthly pre-tax income is $11,500, your debt-to-income ratio is 34.7 percent. 

4,000 / 11,500 = 0.3478 or 34.7 percent

What is a good/ideal debt-to-income ratio?

Good question, because there’s no magic number for DTI.  

Debt-to-income ratio is just one factor that lenders take into consideration when considering your loan application. But that’s not to say an ideal DTI range doesn’t exist. 

Something to be aware of is the 28/36 Rule, which lenders and creditors use to figure out how much money you can borrow. 

It recommends that a household should spend no more than 28 percent of its gross monthly income on total housing expenses (the front-end ratio) and spend no more than 36 percent spent on total debt (back-end ratio).  

Of course, different types of loans have their own requirements. Let’s look at a few.

Conventional Mortgage

A conventional mortgage is a loan from a bank, credit union or mortgage lender that is not backed by the government. Fannie Mae, which provides housing financing for homebuyers across the U.S., requires applicants to have a DTI lower than 36 percent of their monthly income. However, if a borrower fulfills the credit score and reserve requirements that are found in their Eligibility Matrix, Fannie Mae could approve someone with a DTI as high as 45 percent. 

Secured Loan or Second Mortgage

A mortgage that is secured by a government agency, like the Federal Housing Association or the Veterans Administration, takes both the front-end and back-end DTI into consideration. 

The maximum DTI ratios for an FHA loan are 31 percent and 43 percent, meaning that your monthly housing payments shouldn’t exceed 31 percent of your monthly gross income, while your total debt shouldn’t exceed 43 percent of your monthly income.

Personal Loans

DTI limits could be higher for a personal loan than a mortgage, but that all depends on the lender. How high? Lenders could be willing to issue loans to people with a DTI greater than 50 percent.

How to lower your debt-to-income ratio

This is a goal worth striving for. 

Here are two tried-and-true ways to improve your debt-to-income ratio: lower your monthly recurring debts and increase your monthly income. 

If you’re adamant about lowering your monthly recurring debts, there are some popular ways to go about this, such as reconsidering or delaying making any large purchases that you cannot immediately pay in full, and refraining from opening and using new (unnecessary) lines of credit. Again – the more you can limit the amount of recurring debt you incur, the better for your DTI. 

If increasing your gross monthly income is your strategy, then you’re probably thinking about your annual review and what you need to do in order to hit that pay raise. If your employer offers overtime – state troopers, for example – then that could be in the cards. 

But there doesn’t have to be an either/or approach to lowering your debt-to-income ratio. You could lower your monthly debt by a few hundred dollars and earn a pay raise that could chip away at your DTI.  

Does DTI affect your credit score?

Glad you asked. We wouldn’t blame you if you thought it did – this is a popular question – but the answer is no – your debt-to-income ratio does not affect your credit score. If you thought it did, you might be confusing DTI with your credit utilization ratio, also known as your debt-to-credit ratio – which does impact your credit score. 

Your credit utilization ratio, which is primarily influenced by your revolving credit card debt, accounts for 30 percent of your FICO score. 

So, to recap: your credit score is not impacted by your DTI. But your DTI impacts other very important aspects of your financial life. Continue to strive to keep that number low. 

Learn how you can simplify your debt with a debt consolidation loan

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.