Your debt-to-income ratio (DTI) is a personal finance measure that compares the amount of debt you have to your gross income, which is what you make before taxes. You can calculate your debt-to-income ratio by dividing your total recurring monthly debt by your gross monthly income.
Why do you need to know this number? Because lenders use it as a measure of your ability to repay the money you have borrowed or to take on additional debt—such as a mortgage or a car loan. It’s also a helpful number for you to know as you consider whether you want to make a big purchase in the first place. This article will walk you through the steps to determine your debt-to-income ratio.
Key Takeaways
- To calculate your debt-to-income ratio (DTI), add up all of your monthly debt obligations, then divide the result by your gross (pre-tax) monthly income, and then multiply that number by 100 to get a percentage.
- Calculating your debt-to-income ratio before making a big purchase, such as a new home or car, helps you see whether or not you can afford it.
- To lower your DTI, you can pay off debt, avoid taking on new debt, and increase your income.
How to Calculate Your DTI
To calculate your debt-to-income ratio, start by adding up all of your recurring monthly debts. Beyond your mortgage, other recurring debts to include are:
- Auto loans
- Student loans
- Minimum credit card payments
- Child support and alimony
- Any other monthly debt obligations
Next, determine your gross (pre-tax) monthly income, including:
- Wages
- Salaries
- Tips and bonuses
- Pension
- Social Security
- Child support and alimony
- Any other additional income
Now divide your total recurring monthly debt by your gross monthly income. The number will be a decimal. Multiply it by 100 to express your debt-to-income ratio as a percentage.
Your debt-to-income ratio, along with your credit score, is one of the most important factors lenders consider when you apply for a loan.
Can You Afford that Big Purchase?
If you are considering a major purchase, you should take into account its cost as you work out your debt-to-income ratio. You can be sure that any lender considering your application will do so.
You can use an online calculator to estimate the amount of the monthly mortgage payment or new auto loan that you are considering.
Comparing your “before” and “after” debt-to-income ratio is a good way to help you determine whether you can handle that home purchase or new vehicle right now.
When you pay off debt—such as a student loan or a credit card—recalculating your debt-to-income ratio shows how much you have improved your financial status.
For example, in most cases, lenders prefer to see a debt-to-income ratio smaller than 36%, with no more than 28% of that debt going towards servicing your mortgage.1 To get a qualified mortgage, your maximum debt-to-income ratio should be no higher than 43%.2 Let’s see how that could translate into a real-life situation.
36%
Most lenders prefer to see a debt-to-income ratio of no higher than 36%.
Example of a DTI Calculation
Here’s a look at an example of a debt-to-income ratio calculation.
Sruthi has the following recurring monthly debts:
- $2,200 mortgage
- $700 auto loan
- $500 student loan
- $200 minimum credit card payments
Sruthi’s total recurring monthly debt equals $3,600.
She has the following gross monthly income:
- $4,000 salary from her primary job
- $2,000 from her secondary job
Sruthi’s gross monthly income equals $6,000.
Sruthi’s debt-to-income ratio is calculated by dividing her total recurring monthly debt ($3,600) by her gross monthly income ($6,000). The math looks like this:
Debt-to-income ratio = $3,600 / $6,000 = 0.60
Now multiply by 100 to express it as a percentage:
0.60 X 100 = 60%
Sruthi’s debt-to-income ratio = 60%
Less debt and/or a higher income would give Sruthi a lower, and therefore better, debt-to-income ratio. Say she sells her home to move into a smaller apartment, plus she trades in her vehicle for a used car, pays off her credit cards, and picks up more shifts at her second job. In that case, Sruthi’s recurring monthly debts would be:
- $1,500 mortgage
- $400 auto loan
- $500 student loan
And her income would be:
- $4,000 salary from her primary job
- $2,800 from her secondary job
So the calculation would be:
Total recurring monthly debt = $2,400
Gross monthly income = $6,800
Sruthi’s new debt-to-income ratio = $2,400 / $6,800 = 0.35 X 100 = 35%.
This would place her within the range of what lenders are looking for: a DTI ratio of 36% or less.
What Is Gross Income?
Gross income is the amount of money you make before any taxes are taken out.
What Is Net Income?
Net income is your gross income minus income taxes. It’s your take-home pay.
What Is the Median Mortgage Payment in the U.S.?
The median payment for new mortgages across the U.S. was $2,041 in September 2024, according to the Mortgage Bankers Association.3
The Bottom Line
The debt-to-income ratio is an important number. It will show you exactly how much of your income is going to pay off debt. Lenders use it to decide whether you can afford a new loan, such as a mortgage or auto loan. You can also use it to see if you can afford that new purchase.