Explore Jobs

Find Specific Jobs

Explore Careers

Explore Professions

Best Companies

Explore Companies

What Is Debt-to-Income Ratio (DTI)? (And How To Calculate It)

By Jack Flynn
Dec. 7, 2022
Last Modified and Fact Checked on:

Find a Job You Really Want In

Understanding Debt-to-Income Ratio (DTI) in 2026: What You Need to Know

Summary: Your debt-to-income ratio (DTI) is the percentage of your gross monthly income allocated to debt payments. Lenders, including banks and credit unions, utilize your DTI to assess your ability to manage monthly payments and predict repayment likelihood.

Whether you’re planning to purchase a new vehicle or your dream home, your debt-to-income ratio (DTI) plays a crucial role in determining your purchasing power and timing.

When considering significant purchases that necessitate financing, your DTI is vital, as lenders evaluate it to decide on loan approvals and terms.

Fortunately, you can calculate your DTI independently, empowering you to forecast your loan eligibility. The more informed you are about your financial status, the better equipped you’ll be to make decisions that drive your financial goals.

Key Takeaways:

  • The debt-to-income ratio, or DTI, is a measure of your monthly debt compared to your monthly income.

  • A DTI of 43% or lower is generally regarded as favorable.

  • A high DTI can complicate loan approvals, impacting your long-term financial objectives.

Understanding Debt-to-Income Ratio (DTI) in 2026

In This Article   
Skip to section

What Is Debt-to-Income Ratio?

Your DTI ratio, expressed as a percentage, indicates the portion of your average income that goes toward debt payments. For instance, a DTI of 23% signifies that you allocate 23% of your gross income to monthly debt obligations.

Ideally, you want your DTI to be as low as possible. A high DTI of 60% would leave minimal income for essentials like groceries or entertainment. Lenders view a high DTI as a significant concern, suggesting that the borrower may struggle to take on additional debt.

Consequently, your DTI will heavily influence your financing options, as lenders examine it before granting loans.

How Banks Assess Debt-to-Income Ratio

Generally, lenders prefer your debts to make up no more than 36% of your monthly income. While there may be some flexibility up to 5%, a lower DTI is always preferable. Lenders adhere to these benchmarks to ensure that borrowers retain sufficient income to manage the financial burden of a new loan.

A low DTI also reflects positively on your financial profile. For example, a high DTI might correlate with credit score issues, such as missed payments.

However, lending criteria can vary. For instance, if you’re seeking a mortgage, certain loan types, like FHA loans, might permit a higher DTI ratio. While these loans may come with additional costs or stipulations, they remain viable options.

Debts Included in Your DTI Ratio

Understanding what debts factor into your DTI ratio is crucial for both calculating it and comprehending how lenders will evaluate your financial standing. Common recurring debts include:

  • Rent or Mortgages

  • Auto Loans

  • Student Loans

  • Child Support Payments

  • Alimony Payments

  • Minimum Credit Card Payments

  • Personal Loans

Typically, utility bills and essential living expenses like food and gas are not included in the DTI calculation.

Therefore, if you’re contemplating a new loan, it’s vital to not only assess your DTI but also factor in any other monthly expenses. While lenders may not evaluate these additional costs, being aware of your overall financial picture is beneficial.

How To Calculate Your DTI Ratio

Calculating your DTI ratio is a straightforward process. Follow these steps:

  1. Add your monthly debt payments to find your total monthly debt.

  2. Determine your total monthly income before taxes.

  3. Divide your total monthly debt by your gross monthly income.

  4. If your income exceeds your debt, the result will be a decimal.

  5. Multiply the decimal by 100 to obtain your DTI percentage.

The DTI equation is:

Total Monthly Debt Payments ÷ Gross Monthly Income = Total DTI

If your DTI exceeds 50%, consider paying down existing debts before pursuing new financing. Conversely, if your DTI is below 30%, you may qualify for larger loans than anticipated.

Regardless, staying updated on your DTI is essential for making informed financial decisions.

Debt-to-Income Ratio Example

To illustrate the significance of DTI, consider this scenario:

Example DTI

Thomas is eager to finance his first home and wants to calculate his DTI before applying for a loan. Here are his current monthly debt payments:

  • Auto Loan: $250

  • Credit Card Payments: $60

  • Student Loans: $300

  • Personal Loans: $100

Thomas’ Total Monthly Debt Payments: $710

Now, let’s consider Thomas’s total monthly income, which is $2,200. Applying these figures to our formula:

$710 ÷ $2,200 = 0.32

Multiplying 0.32 by 100 yields a DTI ratio of 32%.

Tips for Improving Your DTI

To effectively lower your debt-to-income ratio, consider these two strategies:

  • Reduce your debt. Prioritize your expenses and make necessary sacrifices. You may need to lower other costs to pay down existing debts.

  • Increase your income. To boost your income, seek a raise at your current job, pursue a higher-paying position, or take on a side job. These options require effort and determination, so consider acquiring new skills to enhance your employability.

Though these actions may not be simple, taking small steps to decrease your DTI can yield significant long-term benefits. Always evaluate your options and strive to progress toward your financial aspirations.

Understanding Your Financial Goals

Your DTI ratio serves as a critical financial indicator, illuminating your current financial health. Without a clear understanding of your situation, setting achievable financial goals becomes challenging.

Consider where you envision yourself in one year or even five. Do you aspire to own a home or upgrade your vehicle? If you have specific financial ambitions, it’s crucial to develop plans that will support those goals.

Additionally, being aware of your financial objectives can guide you in making smart investments and help you avoid the detrimental effects of interest and inflation.

Ultimately, regardless of your current circumstances, it’s never too late to explore aspects of your financial situation, such as your DTI ratio, to better prepare for the future.

Debt-to-Income Ratio FAQs

  1. What is Debt-to-Income Ratio?

    2. The debt-to-income ratio (DTI) measures the total monthly debt payments of an individual or entity divided by their income, expressed as a percentage. Lenders use DTI to evaluate financial health and stability when considering loan applications.

  2. What is considered a good debt-to-income ratio?

    3. A DTI of 43% or lower is typically deemed good, although a higher DTI might be acceptable in certain scenarios, such as low-risk loans or strong credit profiles.

  3. How do I calculate my DTI?

    4. To determine your DTI, divide your total monthly debts by your income. Include debts such as mortgages, student loans, auto loans, and child support payments. Typically, utilities and living expenses are excluded from this calculation.

References

  1. Consumer Financial Protection Bureau – Understanding Debt-to-Income Ratio

Never miss an opportunity that’s right for you.

Author

Jack Flynn

Jack Flynn is a writer for Zippia. In his professional career he’s written over 100 research papers, articles and blog posts. Some of his most popular published works include his writing about economic terms and research into job classifications. Jack received his BS from Hampshire College.

Responsive Image

Related posts