How to Calculate Your Debt-to-Income Ratio

When lenders are considering you for a loan, they often look at two main things: your credit reports and scores, and your debt-to-income ratio (DTI).

Your DTI is a calculation that looks at how much you earn each month versus how much you owe, and it is used by lenders to measure your monthly ability to repay new debt. Individual lenders set their own DTI limits, and for some types of loans, a higher DTI may be more acceptable.

For example, when applying for a personal loan a higher DTI may be acceptable, but when applying for a mortgage, the lender may have a stricter standard for what DTI they will accept.

Knowing your DTI and being able to calculate it is a valuable step in understanding how to manage your debt when thinking about applying for a new loan.

How Do I Calculate My Debt-to-Income Ratio?

To calculate your DTI, establish what your total monthly debt obligation is and divide that figure by your gross monthly income, according to the Consumer Financial Protection Bureau.

For example, if each month you pay $1,000 for your mortgage payment; $250 for your auto loan; $100 for your student loan; and $200 for other various debt, your total monthly debt obligation would be $1,550—or the sum of all your monthly payments.

  • $1,000 + $250 + $100 + $200 = $1,550 (Total monthly debt obligation)

To calculate your gross monthly income, take your salary before taxes and other deductions and divide it by 12. So if your annual salary is $60,000, your gross monthly income would be $5,000.

  • $60,000 / 12 = $5,000 (Gross monthly income)

Now take your total monthly debt obligations ($1,550) and divide them by your gross monthly salary ($5,000). Then convert the resulting number (0.31) into a percentage by multiplying it by 100. That is your DTI (31%).

  • $1,550 / $5,000 = 0.31
  • 0.31 x 100 = 31%
  • DTI = 31%

What Are the Steps to Calculating Your Debt-to-Income Ratio?

  1. First, find your total monthly debt obligation (total of all monthly debt payments).
  2. Then find your gross monthly income (total annual income, before taxes, divided by 12).
  3. Then divide your monthly debt obligation by your income.
  4. Convert the resulting number into a percentage by multiplying by 100.
  5. The final percentage is your DTI.

How Do I Calculate Front-End DTIs and Back-End DTIs?

For some types of loans, lenders will differentiate between two types of DTIs: front-end and back-end. Here is how these different types of DTIs are calculated:

  • A back-end DTI is calculated by dividing the total of all your monthly debt payments by your gross monthly income. This is the type of DTI calculation we did above.
  • A front-end DTI is calculated by dividing the total of only the monthly debt paid toward housing costs by your gross monthly income.

If you are applying for a mortgage, some lenders will have a maximum front-end DTI that they prefer borrowers stay below. For example, if you are applying for a FHA loan, the maximum front-end DTI allowed is 31%.

What Is a Good Debt-to-Income Ratio to Have?

Your final DTI percentage helps lenders quickly see how your debt matches up to your income, giving them a measure of your monthly payment ability for the new debt they are considering giving you.

The ideal DTI often depends on the type of loan and the lender, but typically when it comes to mortgages, lenders look for DTIs that are less than 43%. In many cases, lenders prefer DTIs that are lower than 36%, according to Experian.

Generally, the lower your DTI, the better, as lenders see you have the extra income after your current debt obligations to take on new loan payments.