Debt-to-Income Ratio (DTI) reflects how much of your gross monthly income is used towards your monthly debt payments. You can calculate your DTI using the Debt-to-Income Ratio Calculator.
FAQ: What people should know
What is debt-to-income ratio or DTI?
Debt-to-Income Ratio (DTI) reflects how much of your gross monthly income is used towards your monthly debt payments. You can calculate your DTI using the Debt-to-Income Ratio Calculator. Just enter your debt payments and annual income to calculate your DTI.
How can you calculate your debt-to-income ratio?
Let's use an example to find out how to calculate Debt-to-Income ratio using the above calculator.
Let's assume your monthly debt includes the following:
Monthly mortgage or rent = $1200
Minimum payment on credit cards = $600
Monthly car loan payment = $650
Minimum Student Loan Payments - $0
Other Loan Obligation = $0
Child Support = $0
Let's consider your income:
Annual gross salary = $ 55000
Bonus income = $5000
Other income = $0
Alimony received = $0
Putting the above details in the Debt-to-Income Ratio Calculator, your DTI comes out to be = 49%.
Apart from the debt-to-income ratio, the calculator will also give you financial suggestion as to whether your debt load can be managed well with your level of income.
What is an acceptable debt-to-income ratio?
Most people are concerned about what an ideal debt-to-income ratio should be. An acceptable DTI ratio (in regards to revolving debt like credit cards) is the one which doesn't exceed 36%. That is, your monthly debt payments shouldn't go beyond 36% of your gross monthly income.
DTI - 36% or less: This is a healthy debt load to carry for most people. However, plan a budget and manage your debts efficiently.
DTI - 37%-42%: Not bad, but start paring debt now before you get in real trouble. You can opt for credit counseling to manage your financial situation in a better way.
DTI - 43%-49%: Financial difficulties are probably imminent unless you take immediate action. If your primary concern is credit card debt, you can consider credit card debt consolidation or credit card debt settlement depending on your financial situation.
DTI - 50% or more: Get professional help to aggressively reduce debt. You can try several debt relief options like debt settlement or bankruptcy.
Why is your debt-to-income ratio important?
When you have an acceptable debt-to-income ratio, it implies that you can manage your debts easily and they’re within your means. So, if your debt-to-income ratio is not more than 36%, lenders will consider you to be a responsible borrower. Thus, a good DTI helps you to qualify for loans (especially mortgage, car loan, student loans) at better rates and terms.
Researches have suggested that people with relatively higher DTI are more likely to experience trouble in managing any new debt and making the required payments on time.
What is meant by the 28 36 rule?
The 28/36 rule is that a household shouldn’t spend more than 28% of their gross monthly income on housing expenses. Also, you shouldn't spend more than 36% of your monthly family income on debt payments, which includes your mortgage payments, too.
This is a standard ratio, which is used by the creditors/lenders to assess a person’s creditworthiness along with his/her credit score.
Are your utilities included in your DTI?
No, utility bills are not included in your DTI. That means, expenses related to your cable, phone, groceries, electricity, gas, etc. are not considered to calculate your DTI. The payments on debts (like credit lines, auto loans, student loan payments, personal loans, along with other debt payments, if any) are only considered to determine your debt-to-income ratio.
Is rent part of your debt-to-income ratio?
Yes. Any debt or debt payments that get reported to the credit bureaus is considered to calculate your DTI. This includes your mortgage payments or housing expenses too. Other debts are mentioned in the last query.
What percentage of your income can you spend on rent and utilities?
The experts consider a good rule of thumb to stay within 30% of your gross monthly income. You shouldn't spend more than 30% of your gross monthly income towards your utilities and rent in a month.
For example, if your gross monthly income is $5000, then you shouldn't spend more than $1500 on housing expenses (can be rent) and utilities.
However, financially healthy individuals spend a maximum of 33% towards the housing expenses.
How much of your income (take-home pay) should you spend on rent?
You should keep your rent and other utility payments within 30% of your monthly take-home amount.
It is better to consider the take-home amount as that’s the money with which you need to manage your monthly expenses.
How much should you spend on groceries in a month for one person?
According to the experts, you should allot not more than $125 per person in your monthly grocery budget.
For example, if you have 4 family members, then your monthly grocery budget shouldn’t exceed more than $500.
How much should you spend on buying a house based on your income?
The rule suggests that you should not spend more than 28% of your monthly income towards your housing expenses.
To give you an idea, if your annual income is $50,000, then do not spend more than $1,166 [$(28% x 50000) % 12] on your monthly housing expenses.
Why should you keep track of your DTI?
It is important to keep track of your debt-to-income ratio as it helps you to identify your financial standing. DTI makes it easier to compare your income with what you owe to your creditors. You'll come to recognize when your debt load is too high and whether you need to take steps to avoid debt problems in the future.
How do you lower your debt-to-income ratio?
You can lower your DTI by:
- Making extra debt payments to reduce the outstanding balance
- Do not make large purchases using a credit card
- Avoid taking out a loan for the time being