Calculating your debt-to-income (DTI) ratio is a straightforward process that provides valuable insight into your financial health. This ratio, expressed as a percentage, compares your monthly debt payments to your gross monthly income. Lenders use DTI to evaluate loan applications, and you can use it to assess your financial situation and borrowing capacity.
Step 1: Calculate your gross monthly income
- For salaried employees: Divide annual salary by 12 months
- For hourly workers: Multiply hourly rate by average hours worked per week, then multiply by 52 weeks and divide by 12 months
- Include all income sources:
- Regular wages and salary
- Self-employment income
- Consistent overtime or bonuses
- Alimony or child support received
- Rental property income
- Retirement income
- Investment income (if regular and documented)
- For joint calculations (e.g., mortgage applications), combine both individuals’ incomes
Step 2: Calculate your total monthly debt payments
- Include these recurring monthly obligations:
- Mortgage or rent payment
- Auto, student, and personal loan payments
- Minimum required credit card payments
- Child support or alimony you pay
- Any other monthly debt obligations with fixed payments
- Do NOT include these expenses:
- Utilities (electric, water, gas, internet)
- Insurance premiums (unless included in mortgage payment)
- Cell phone bills
- Groceries or dining expenses
- Entertainment and subscription services
- Medical expenses
- Transportation costs (gas, maintenance)
Step 3: Calculate your debt-to-income ratio
- Divide your total monthly debt payments by your gross monthly income
- Multiply the result by 100 to convert to a percentage
Formula: DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Example calculation:
Gross monthly income: $6,000
Monthly debt payments:
– Mortgage: $1,500
– Car loan: $350
– Student loan: $250
– Credit card minimums: $100
Total monthly debt: $2,200
DTI = ($2,200 ÷ $6,000) × 100 = 36.7%
Understanding your DTI ratio:
- Below 36%: Healthy financial position, typically preferred by lenders
- 36-43%: Manageable but approaching caution zone, still typically acceptable for most mortgages
- 43-50%: Financial stress zone, may qualify for some loans with compensating factors
- Above 50%: Financial danger zone, difficult to qualify for new credit, may indicate need for debt reduction
For mortgage applications, lenders often calculate two separate ratios:
- Front-end ratio: Housing costs only (mortgage principal, interest, taxes, insurance) divided by gross monthly income
- Back-end ratio: All debt payments including housing costs divided by gross monthly income
Tracking your DTI ratio over time helps monitor your financial health and preparedness for major purchases or loan applications. If your DTI is higher than desired, focus on increasing income, paying down debt, or both to improve this important financial metric.