Debt-to-Income Ratio: How to Calculate and Tips to Lower It

What Is a Debt-To-Income Ratio?

A debt-to-income (DTI) ratio determines how much of your monthly income goes towards making debt payments. This figure is used by lenders to determine if you can afford monthly payments on a new mortgage loan, auto loan, or personal loan.

The front-end ratio is calculated as your housing expenses, such as mortgage, property taxes, and homeowners' insurance, divided by your gross income.

On the other hand, the back-end ratio takes into consideration all other types of loans, such as car loans and credit cards.

The maximum DTI ratio a lender is comfortable with will vary. The general guideline is that the lower your debt-to-income ratio, the higher your chances of getting approved for the loan.

How To Calculate Debt-To-Income Ratio

Your DTI can be calculated with a simple debt-to-income formula. Follow these three steps:

1. Make a list of all your monthly bills. Add your rent payment or mortgage, credit card payments, student loan payments, alimony, child support, and car payments. Groceries, medical costs, and utilities are not included.
2. Divide your debt payments by your monthly gross income. This is the income before deductions and taxes.
3. Multiply this number by 100 to get a percentage.

A Quick Example of a DTI Calculation

Let’s say your total monthly debt payment is $2,500, and your gross monthly income is $6,000. You can calculate your debt-to-income ratio by dividing your debts ($2,500) by your gross income ($6,000).

The resulting number (0.4) can be multiplied by 100 to get your DTI of 40%. This DTI shows that 40% of your gross income goes towards paying your debts each month.

Debt-to-Income Ratio Calculator

Use this debt-to-income ratio calculator to quickly see how much of your monthly income goes toward debt payments. Enter all required fields, then click Calculate to estimate your DTI ratio and understand your current financial position.

What Is an Ideal Debt-To-Income Ratio?

There is no one right answer when it comes to the ideal DTI ratio. It depends on several factors, such as your job stability, income, goals, and lifestyle.

Generally, 43% is the maximum DTI ratio (PDF) most lenders are comfortable with. Mortgage lenders usually prefer to see your total DTI below 36%.

Housing costs alone (rent or mortgage) ideally should not exceed 28% of your gross income. For example, if your gross monthly income is $5,000, keeping your housing payment at or below $1,400 ($5,000 × 0.28) is considered a safer range.

Here’s a breakdown of common debt-to-income (DTI) ranges and what they mean:

0-35% DTI

A DTI of up to 35% is considered healthy as it reflects your ability to repay debts. This means that if you were to take on new debt, you’d find the monthly payments manageable and may still have money left for savings. Lenders mostly view borrowers in this range favorably.

36%-43% DTI

Ratios in this range may mean that you are currently managing your debt well, but there’s less margin for error. Nonetheless, if your situation changes, you may be at risk. You may still qualify for new credit, but there wouldn’t be a lot of wiggle room in your budget.

44%-49% DTI

At this level, you may not be able to qualify for a mortgage but will still qualify for smaller personal loans. This is the perfect opportunity to focus on payoff strategies or talk to a professional about enrolling in a debt relief plan to strengthen your credit profile.

Over 50% DTI

A DTI ratio of above 50% is considered unhealthy. More than half of your gross income goes to debt payments, leaving very little for essentials, emergencies, or savings. It is a sign that you need to reduce your debt load quickly, and you may want to consider options such as debt consolidation or credit counseling.

What Contributes to a Debt-To-Income Ratio?

The two most significant factors affecting your debt-to-income ratio are your income and debt. To achieve a good DTI, both your income and debt levels should be at a healthy level.

If there’s no way for you to increase your income now, focus on debt reduction strategies to get out of credit card debt or other financial burdens.

Having a high DTI might mean you could face higher interest rates when applying for a loan, but it doesn't necessarily mean you can't get approved. By lowering your DTI, you'll open up more loan options and potentially secure better, lower interest rates.

Does Debt-To-Income Impact Credit Score?

Your debt-to-income ratio and your credit score are related, but not in the way most people think.

DTI is not a direct factor in your credit score. Credit-scoring models like FICO don’t use your income, so they don’t calculate your DTI. However, high debt levels often show up in other ways that do impact your score.

The key link between your credit score and DTI is your credit utilization ratio. This is the amount of revolving credit (like credit cards) you’re using compared to your total credit limits, and it constitutes about 30% of your FICO score.

When you pay down revolving debt:

• Your DTI can improve because you have lower monthly payments
• Your credit utilization goes down, which can boost your credit score
• Over time, both lenders and scoring models see you as less risky

When you reduce your total balances through debt solutions like a debt management plan or other structured payoff strategies, you lower both your DTI and your credit utilization. Over time, that combo can strengthen your credit profile and improve your credit score, as long as you avoid running up new balances.

7 Tips To Lower Your Debt-To-Income Ratio

With a low DTI, you can enjoy lower interest rates and get access to more credit options. Here are a few tips on how to achieve that:

1. Find Ways To Increase Income at Your Job

Check with your employer to see if you can get overtime hours at work, which are typically paid at an extra 50% of your hourly rate. You can also negotiate with your current employer for a raise. Either of these options can significantly upgrade your income.

2. Get a Second Job

Find a second part-time job to increase your income. You can also consider seeking a higher-paying job within your industry.

Apply for jobs at as many places as you can and compare the offers you receive to see which one offers you the most boost in income.

3. Start a Side Hustle

Another great way to increase your income is by starting a side hustle or a side business.

Although side hustles may not make you rich, they can provide you with extra income that you can use to get out of debt faster.

4. Pay off Existing Debts

Use any extra cash you have towards paying your loans and credit cards to get rid of debt faster.

If you are making minimum credit card payments, focus on debt repayment strategies like debt snowball or debt avalanche.

• With the debt snowball method, you’ll start by paying off your smallest debt balance. Once that is paid off, you can move on to the next.
• With the debt avalanche method, you can start by paying off the debt with the highest interest rate before moving on to the next debt. This allows you to pay off credit card balances more quickly.
• If you have a lot of debt, you may want to consider debt settlement or another effective debt relief program.

5. Reduce Your Expenses

Review your spending to identify areas where you can save. Consider cutting subscriptions, avoiding dining out, or canceling unused memberships. Use that extra money towards loan payments.

6. Increase Loan Term

You can also negotiate with your lenders to increase your repayment term. This can lower your monthly debt payments and your DTI.

A longer term means you’ll be more likely to pay more in total interest over the loan term, so choose this option cautiously.

7. Avoid Additional Debt

Avoid getting a new credit card or loan. This will only add to your existing debt payments and make the situation worse.

Once you make progress in reducing your DTI, be diligent and avoid taking on any more debt unless it's an emergency. Be sure to learn more about the importance of money management, as it will be vital in avoiding additional debt.

Lower Your DTI Before Applying for a Loan

Your debt-to-income ratio can impact your eligibility to get a loan. Before applying for a new loan, try the tips listed above to lower your DTI and improve your financial health.

TurboDebt® can help you lower your DTI by providing you access to debt relief options that can reduce your overall debt. Our consultations, counseling, and strategic planning services are designed to help you achieve your dream of a debt-free life.

Get in touch with us today for a free consultation. Browse over 20,000+ 5-star TurboDebt reviews and see why thousands of satisfied clients recommend our debt relief services.