What is debt-to-income ratio?

When you apply for a mortgage, car loan or credit card, lenders consider multiple factors such as your credit score and debt-to-income ratio. Your credit score is a three-digit number that reflects your history of paying back your debts. Your debt-to-income ratio (DTI), however, is a reflection of how you’re currently managing your debt and income. Your DTI compares the monthly debt payments you owe to your monthly income. Together, these factors help lenders understand the risk you may pose as a borrower.

By understanding what debt-to-income ratio is and how it’s calculated, you can prepare your finances to shop for a house or other big purchase.

How to calculate debt-to-income ratio

To get your DTI, take all your monthly debt payments and divide that number by your gross monthly income, which is your income before any deductions like taxes and insurance premiums. Debts may include a mortgage, car loan, student loan and the minimum balance on a credit card. It does not include rent or monthly bills like utilities or subscriptions.

For example, if a person has a monthly car payment of $400, student loan payments of $250 and minimum monthly payments of $100 on their credit card accounts, their monthly debt payment total is $750. If their gross monthly income is $5,000, dividing $750 by 5000 would provide a DTI of 15%.

 

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