How To Calculate Your Debt To Income Ratio

1
Introduction: Calculating Your Debt To Income Ratio

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Your debt-to-income (DTI) ratio is the percentage of your income that goes toward paying your debt. It's important not to confuse debt-income ratio with credit utilization which is the amount of debt you have related to your credit limits.

A lot of lenders, especially mortgage and auto lenders, use your debt-to-income ratio to figure out how much a loan you can handle. For example, a mortgage lender will use your debt-to-income ratio to figure out how much mortgage you can afford after all your other monthly debts are paid.

You, too, can calculate your debt-to-income ratio to figure out how much debt you have. Print and use the Debt to Income Ratio Worksheet to help calculate your ratio.

While it's good to know how you can calculate your debt-to-income ratio by hand, you can also use a debt-to-income ratio calculator to get a faster result.

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Total Your Monthly Debt

Your debt-to-income ratio is equal to your monthly debt payments divided by monthly income.

DTI = monthly debt / monthly income

The first step in calculating your debt-to-income ratio is determining how much you spend each month on debt.

To start, add up what you spend each month on the following:

  • Mortgage or rent
  • Minimum credit card payments
  • Car loan
  • Student loans
  • Alimony/child support payments
  • Other loans

This is the total amount you spend each month on debt.

Example:

Let's assume Sam has the following expenses:

  • mortgage = $950
  • minimum credit card payments = $235
  • car loan = $355

$950 + $235 + $355 =
Sam's total monthly debt payments = $1,540

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Total Your Monthly Income

The next step to determining your debt-to-income ratio is calculating your monthly income.

Start by totaling your yearly income. Add up your yearly:

  • Gross income
  • Bonuses or overtime
  • Alimony/child support
  • Other income

Then, divide your yearly income by 12 to determine your monthly income.
 

Example

Remember, Sam spends $1,540 each month on debt payments. This is what he receives in income each year.

  • annual gross income = $42,000
  • child support = $6,000

Sam's total annual income = $42,000 + $6,000 = $48,000.
Let's divide his annual income by 12 for his monthly income.
$48,000 / 12 = $4,000 monthly income

4
Calculate Your Debt To Income Ratio

Once you've calculated what you spend each month on debt payments and what you receive each month in income, you have what you need to calculate your debt-to-income ratio. To calculate the ratio, divide your monthly debt payments by your monthly income. Then, multiply the result by 100 to come up with a percent.

Example

In our example, Sam's monthly debt payments total $1,540 and his monthly income total $4,000. So, let's divide $1,540 by $4,000 and then multiply by 100.

$1540 / $4000 = .385 X 100 = 38.5%

Sam's debt to income ratio is 38.5%.

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What Your Debt To Income Ratio Means

Your final result will fall into one of these categories.

36% or less is the healthiest debt load for the majority of people. Avoid incurring more debt to maintain a good ratio.

37%-42% isn't a bad place to be. If your ratio falls in this range, you should start reducing your debts.

43%-49% is a ratio that indicates likely financial trouble. Start paying your debts now to prevent an overloaded debt situation.

50% or more is a dangerous ratio. You should be aggressively paying off your debts. Don't hesitate to seek professional help.

Example

In our example, Sam's debt to income ratio is 38.5%. This isn't a bad ratio, but it could become worse if Sam increases his monthly debt payments without increasing his income.