Calculate your debt to income ratio

Your debt-to-income ratio (DTI) is a personal finance metric that compares the amount of debt you have to your gross income, which is what you earn before taxes. You can calculate your debt-to-income ratio by dividing your total monthly debt by your gross monthly income.

Why do you need to know this number? Because lenders use it as a measure of your ability to repay the money you borrow or take on additional debt, such as a mortgage or car loan. It’s also useful to know when you’re considering whether you want to make a large purchase at all. In this article, you’ll learn how to determine your debt-to-income ratio.

How to Calculate Your DTI

To calculate your debt-to-income ratio, start by adding up all your regular monthly debts. In addition to the mortgage, other recurring debts include:

Next, determine your gross monthly income (before taxes), including:

• Wages
• Salaries
• Tips and bonuses
• Pension
• Social Security
• Child benefit and alimony
• Any other additional income

Now divide your total monthly debt by your gross monthly income. The number will be decimal. Multiply it by 100 to express your debt-to-income ratio as a percentage.

Can you afford such a big purchase?

If you’re considering a large purchase, you should take the cost into account when calculating your debt-to-income ratio. You can be confident that any lender considering your application will do so.

You can use an online calculator to estimate your monthly mortgage payment or new car loan you’re considering.

Comparing your debt-to-income ratio “before” and “after” is a good way to help you determine whether you can handle buying a home or a new car right now.

For example, in most cases, lenders prefer to see a debt-to-income ratio of less than 36%, with no more than 28% of that debt going toward servicing your mortgage. To qualify for a qualified mortgage, your maximum debt-to-income ratio must not exceed 43%. Let’s see how this can be implemented in a real situation.

DTI calculation example

Here’s an example of calculating your debt to income ratio.

Shruti has the following regular monthly debts:

• $2,200 mortgage
• Car loan $700
• $500 Student Loan
• The minimum credit card payment is $200.

Shruti’s total monthly debt is $3,600.

She has the following gross monthly income:

• Salary $4000 at main job
• $2,000 from her extra work

Shruti’s gross monthly income is $6,000.

Shruti’s debt-to-income ratio is calculated by dividing her total monthly debt ($3,600) by her gross monthly income ($6,000). The math looks like this:

Debt to income ratio = $3,600 / $6,000 = 0.60.

Now multiply by 100 to express it as a percentage:

0.60 x 100 = 60%

Shruti’s debt to income ratio = 60%.

Less debt and/or higher income will give Shruti a lower and therefore better debt to income ratio. Let’s say she sells her house to move to a smaller apartment, plus she trades in her car for a used car, pays off her credit cards, and gets more shifts at her second job. In this case, Shruti’s regular monthly debts will be as follows:

• Mortgage $1500
• Car loan $400
• $500 Student Loan

And her income will be:

• Salary $4000 at main job
• $2800 for additional work

So the calculation will be like this:

Total monthly debt = $2,400.

Gross monthly income = $6,800.

Shruti’s new debt to income ratio = $2,400 / $6,800 = 0.35 X 100 = 35%.

That would put it in the range of what lenders are looking for: a DTI ratio of 36% or less.

Bottom line

The debt-to-income ratio is an important indicator. It will show you exactly how much of your income will go toward paying off your debt. Lenders use it to decide whether you can afford new credit, such as a mortgage or car loan. You can also use it to see if you can afford that new purchase.