# Debt-to-Income (DTI) Ratio: What’s Good and How To Calculate It

> **Definition**
>
> Debt-to-income (DTI) ratio compares your recurring monthly debt payments against your monthly gross income, expressed as a percentage.

## What Is Debt-to-Income (DTI) Ratio?

Debt-to-income (DTI) ratio compares your recurring monthly debt payments against your monthly gross income. It’s expressed as a percentage. DTI includes most sources of debt and income but excludes items like utility bills and unverifiable income. Lenders use your DTI ratio as an approval factor when [applying for loans](https://www.investopedia.com/the-best-personal-loans-for-debt-consolidation-8762444) and consider lower percentages more favorable.

### Key Takeaways

*   Your debt-to-income ratio compares your monthly debt expenses to your gross income, written as a percentage. 
*   Lenders use your DTI ratio to help assess how likely you are to repay when [applying for a personal loan](https://www.investopedia.com/the-best-personal-loans-for-debt-consolidation-8762444), mortgage, or other credit product.
*   Lenders generally prefer a DTI ratio of no more than 36%, but the cutoff can sometimes be as high as 50%. 
*   If your DTI ratio is too high to qualify for a loan, you can lower it by increasing your income, reducing your total debt, or both. It’s also worth checking your credit reports to make sure your high DTI ratio isn’t a result of an error.

![Debt-to-Income (DTI) Ratio](https://www.investopedia.com/thmb/k7uW8OI6VhD00B8Shzqznmfi2BM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dti-0c7453b83dae4648a4cf19c5a66fad20.jpg)

*— Ellen Lindner / Investopedia*

## How to Calculate Your DTI Ratio

First, add up all your monthly debt payments, such as payments on a [mortgage](https://www.investopedia.com/terms/h/home-mortgage.asp), credit card, and student loan. Then divide that total by your gross income and multiply the result by 100 to get your DTI ratio as a percentage. Here’s the formula:

**DTI ratio = (Total monthly debt payments ÷ gross monthly income) x 100**

Say you make $5,000 monthly before taxes and pay $1,000 toward credit card debt, car loans, and student loans. Here’s how to find your DTI ratio:

DTI ratio = ($1,000 ÷ $5,000) x 100

DTI ratio = 0.2 x 100

DTI ratio = 20%

In our example, your DTI ratio is 20%.  

> **Important**
>
> The Consumer Financial Protection Bureau has a DTI ratio calculator that does the math for you. 

## What Does Your DTI Ratio Include? 

Debt like home loans and [revolving debt](https://www.investopedia.com/terms/r/revolvingcredit.asp), as well as income from wages and child support, must be factored in when calculating your DTI ratio. Here’s more on what to include in your calculations:

### Debts Typically Included

**Housing Expenses**

*   Mortgage or rent payments
*   [Property taxes](https://www.investopedia.com/terms/p/propertytax.asp)
*   Homeowners/renters insurance
*   HOA fees (if applicable) 
*   Maintenance fees 

**Revolving Debt**

*   Credit card minimum payments (not the total balance)
*   Home equity line of credit (HELOC) payments 
*   Other line of credit minimum payments

**Installment Loan Payments**

*   Student loans
*   Personal loans
*   Auto loans and leases
*   Recreational vehicle loans (boats, motorcycles, RVs)
*   Co-signed loan payments
*   IRS installment agreements

**Other Debt Obligations**

*   Child support payments
*   Alimony/spousal support
*   Time-share payments
*   Any court-ordered payments

### Income Typically Included

*   [W2 income](https://www.investopedia.com/terms/w/w2form.asp) and tips
*   Self-employment income based on tax returns
*   Pensions and other retirement income
*   Investment income from rental properties and stocks
*   Recurring payments from lottery winnings
*   Alimony/spousal support 
*   Child support
*   Social Security benefits

## What Does Your DTI Ratio Exclude?

Debt in your DTI ratio doesn’t include utility bills and retirement contributions, and income doesn’t include one-time payments and unverifiable cash sources. Here’s more on what to exclude from your calculations.

### Debts/Expenses Typically NOT Included

*   Utility bills (electricity, water, internet, phone)
*   Insurance premiums (except those included in mortgage payments)
*   Groceries and food expenses
*   Entertainment or subscription services
*   Medical bills not financed through loans
*   Childcare expenses (unless through a formal loan)
*   [Retirement contributions](https://www.investopedia.com/terms/r/retirement-contribution.asp)
*   Solar panel leases, power purchase agreements (PPAs), or other similar agreement

### Income Typically NOT Included

*   One-time payments or windfalls (inheritance, lottery)
*   Income from household members not on the loan application
*   Temporary income sources expected to end soon
*   Unverifiable cash income without documentation 

## Understanding Debt-to-Income Ratio

Your debt-to-income ratio shows how much of your gross monthly income goes toward debt payments. For example, a DTI of 25% means that 25% of your gross income goes toward paying your monthly debts. 

Lenders use your DTI ratio to help determine your ability to make loan payments and repay debt. It’s a significant factor in their consideration. Lenders commonly use DTI ratios to review applications for mortgages, car loans, personal loans, and credit cards. You may not be approved for a loan if your debt-to-income ratio is too high.

## Debt-to-Income Ratio Guidelines

Most lenders like a DTI ratio of not more than 35% or 36%. Sometimes, mortgage lenders will still approve your loan if your DTI is up to 45% (or 50% for an FHA loan). Your DTI ratio is too high if it exceeds your lender’s max DTI ratio, making you ineligible for the loan. 

For example, Freddie Mac is a government-created company that buys mortgages from banks and lenders. Its general cutoff point for the DTI ratio is 36%, but borrowers can have a DTI ratio up to 45% in certain circumstances. Borrowers with a DTI ratio higher than 45% are ineligible to be sold to Freddie Mac.

Another government-sponsored company, Fannie Mae, has a general cutoff point of 36%. Its higher cutoff point is 45% for borrowers meeting certain criteria and 50% for loans underwritten using Fannie Mae’s proprietary system.  

> **Tip**
>
> Improving your credit score can help compensate for a higher DTI ratio that doesn’t meet your lender’s guidelines. It won’t reduce your ratio, but it may help your chances of approval.

## How to Lower Your Debt-to-Income Ratio

Because your DTI ratio is a fraction, lowering it comes down to math: You can lower the numerator or increase the denominator. In other words, you can either reduce your debt or make more money. Here’s more on these and other ways to get a more favorable DTI ratio. 

*   **Lower your debts by paying them off**: One popular way to pay off debt is to focus on paying off your smallest debt before moving to the next (snowball method). Another popular method is to tackle debt with the highest interest rate first (avalanche method). Here’s how these two [debt payoff methods](https://www.investopedia.com/articles/personal-finance/080716/debt-avalanche-vs-debt-snowball-which-best-you.asp) compare.  
*   **Make more money**: If you’re able to, consider increasing your income by taking on freelance work, starting a side gig, asking for a raise, or finding a new job. 
*   **Check your credit reports for errors**: Your monthly debt payments appear on your credit reports. If your reports are inaccurate, your DTI ratio could look worse than it actually is. If you find any errors on your credit reports, take steps to fix them. You can [check your credit reports on your own](https://www.investopedia.com/how-to-get-your-annual-credit-report-5224898) at AnnualCreditReport.com or through a variety of [credit monitoring services](https://www.investopedia.com/the-best-credit-monitoring-services-8763926).
*   **Lower your spending**: Spending less can indirectly help lower your DTI because it helps you avoid increasing your overall debt and can free up more income for debt repayment. This can involve minimizing credit card use or [making a budget](https://www.investopedia.com/financial-edge/1109/6-reasons-why-you-need-a-budget.aspx) until your DTI is where you need it.   
    

> **Tip**
>
> Job switches are less risky if they’re in the same industry and at a higher salary, and if you’ve maintained a steady career up to that point. If you’re applying for a loan and you just took a new job or have one coming up, lenders might ask for extra documentation, such as a job offer letter and pay stubs in line with the income shown on the letter. 

## The Bottom Line

Your debt-to-income ratio plays a significant role in qualifying for a loan. Lenders may not approve you if your ratio is beyond their maximum allowed. However, you can improve your ratio by paying off loans and other debts or making more money. [Checking your credit reports](https://www.investopedia.com/the-best-credit-monitoring-services-8763926) is essential, too, because errors could make your DTI ratio seem higher than it is.  

> **Article Sources**
>
> 1.  Freddie Mac. “[Monthly Debt Payment-to-Income (DTI) Ratio](https://guide.freddiemac.com/app/servicing/section/5401.2).”
>     
> 2.  Wells Fargo. “[Understanding Your Debt-to-Income Ratio](https://www.wellsfargo.com/goals-credit/smarter-credit/credit-101/debt-to-income-ratio/dti-faqs/).”
>     
> 3.  Fannie Mae. "[Originating & Underwriting Selling Guide](https://selling-guide.fanniemae.com/sel/b3-6-02/debt-income-ratios)."