Your debt-to-income ratio (DTI ratio) is a calculation that shows your monthly debt obligations as a percentage of your monthly income.
HOW IT'S CALCULATED
The calculation is relatively simple. To arrive at your DTI ratio, add all installment payments and revolving debts and divide by your monthly income. As a general rule, include all installment payments that appear on your credit report. These may include student loan payments, car payments, and child support, among other obligations. Then simply divide by your total monthly income.
So, for example, if you have a $300 car payment and a $500 student loan payment each month along with a monthly income of $4500, your calculation would look like the one below:
($300+$500)/$4,500 = .18
In this case, your DTI ratio is .18 or 18%.
While the calculation is straightforward enough, you can use this DTI calculator to determine your personal ratio.
WHICH MEASURE OF INCOME IS USED?
To calculate your DTI ratio, use your monthly income before taxes. This is the way lenders perform the calculation, even though you might not take all of that money home.
DOES DEBT-TO-INCOME RATIO IMPACT CREDIT SCORE?
No. Your DTI ratio won't impact your credit score.
Typically, the credit agencies cannot perform this calculation because while they know how much owe, they don't necessarily know how much you earn.
WHAT IS A GOOD DEBT-TO-INCOME RATIO?
If you're not looking to purchase a home or take out a large line of credit, there's really no exact criteria for what constitutes a healthy debt-to-income ratio. That is, your ability to manage debt is influenced by numerous factors including your age, education, career prospects, and overall spending habits.
If you are looking to secure a mortgage, lenders use your DTI ratio to determine whether you're likely to be able to pay back a new loan. Generally speaking, they're looking for a total debt expenditures to be less than 36% of your monthly income, with no more than 28% of your income dedicated to servicing a mortgage.