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 in order to calculate your DTI.
How to calculate debt to income ratio
Let's use an example in order 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
Other obligations = $0
Let's consider your income:
Annual gross salary = $ 55,000
Bonus income = $5,000
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 a 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 debt to income 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.
How important is debt to income ratio?
It is essential that you have an acceptable debt to income ratio. It implies that you can manage your debts easily and within your means. So, if you have a debt to income ratio 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.
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 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.