Your Debt-to-Income ratio (DTI) is the percentage of your gross income that goes to monthly debt commitments. A high debt-to-income ratio signifies to lenders that you may be unable to take on more debt, which makes you a lending risk. A low DTI demonstrates the ability to take one more debt and still cover your daily expenses. Lenders use the DTI to assess the risk of lending to you.
How to Calculate Debt-to-Income Ratio
You can calculate your DTI in a few simple steps. Here is how to do it:
- Add up all your monthly debt payments. This includes mortgage payment or rent, student loans, auto loans, child support, alimony, insurance premiums, and minimum credit card payments.
- Note your gross monthly income. This is your income before taxes or expenses.
- Divide the debt calculation from step 1 by the gross monthly income from step 2.
The result is your debt-to-income ratio.
If that seems confusing, or you don’t want to get out a calculator, you can use our simple DTI calculator.
➗ Go to the full page to view and use the calculator.
What is a Good Debt-to-Income Ratio?
A good debt-to-income ratio is under 35%. That means that you should be able to easily pay off monthly debt while managing other expenses with your income. Lenders prefer a figure of 35% or less when considering loan eligibility. With a low DTI, lenders see you as someone able to comfortably manage additional debt payments.
A debt-to-income ratio between 35% and 49% is still considered ok but carries a greater risk. It demonstrates that while you are managing debt, there is room for improvement. Lenders may require additional eligibility requirements in this case, such as a larger down payment, a co-signer on the loan, assets, or proof of cash reserves.
As a rule of thumb, no more than ⅓ of your monthly income should go to housing expenses. This matches with the FHA guidelines of up to 31% DTI for mortgage or housing payments specifically. The lower your DTI, the more opportunities are available to qualify for loans and get better interest rates.
💡 It is a good idea to work on lowering your DTI to 30% or less. That’s not just about qualifying for loans. A low DTI means you have more disposable income to build savings and invest. It provides security in the case of unforeseen circumstances and ensures that your debt does not get out of control.
The Average American’s Debt-to-Income Ratio
The average American’s debt-to-income ratio is not a one-size-fits-all number. Debt factors include the level of education, race, and gender. While some scales put the average American’s DTI as low as 9%, the Federal Reserve notes a wide range by state, with the lowest average DTI in Washington DC and the highest average DTI in Colorado and Idaho.
DTI: Loan Requirements
If you plan to get any type of loan, from a mortgage to an auto loan, VA loan, or FHA loan, lenders will consider your debt-to-income ratio. Here are the ideal DTI ranges for different types of loans. With this information and our DTI calculator, you can assess your qualifications before you apply.
DTI for a Mortgage
Mortgage lenders prefer a debt-to-income ratio of 30% or lower. The upper maximum DTI for loan consideration is 43%. This will vary with the individual lender. Some institutions, such as community credit unions, may be more lenient in DTI requirements.
Lenders will also look at how much of your income is currently going to service a mortgage or rent payments. Ideally, 28% or less of your income will go to a mortgage or rent in order to qualify for an additional mortgage or loan.
Just because the maximum debt-to-income ratio is 43%, you will not necessarily get approved for a mortgage with that DTI. Lenders will also consider your credit score, cash reserves, salary, and other assets before making a lending decision.
DTI for a VA Loan
VA loans are somewhat more lenient than traditional mortgages. With a VA loan, you can have a DTI of 41% or less. That means that if your income is $5000 per month, you can have debt payments up to $2050 and qualify for a VA loan.
However, loan approval is not guaranteed with any DTI. A lower debt-to-income ratio, a high credit score, and some assets or savings will help you qualify for a VA loan.
DTI for FHA Loans
The Federal Housing Administration (FHA) sets maximum debt-to-income ratios on their loans to ensure that borrowers are able to meet mortgage payments and cope with the additional expenses associated with homeownership. The FHA guidelines are designed to prevent buyers from purchasing homes they cannot afford.
The FHA looks at two debt-to-income ratios:
- Mortgage payment to gross monthly income.
- Total fixed payments to gross monthly income.
The mortgage payment to gross monthly income ratio is based on the size of your housing payment. In addition to the principal and interest, this includes insurance, mortgage insurance premiums, homeowners’ due or fees, and escrow for taxes.
The maximum amount to qualify for an FHA loan is 31% for the mortgage-to-income ratio.
The total fixed payment-to-income ratio is the same as the standard DTI ratio calculated above. It takes into account all types of debt in addition to mortgage debt. The maximum DTI to qualify for an FHA loan is 43%.
In certain cases, FHA loans do allow for greater flexibility. If the borrower makes a substantial downpayment, can demonstrate large savings or cash reserves, or has an exceptional credit score, a lender has the flexibility under FHA rules to justify loan approval even with a higher DTI ratio.
If you anticipate lower housing expenses at some point, you can ask the loan officer to calculate your DTI based on that lower number, allowing a greater possibility of loan approval. This is especially true if you expect to be able to pay off a significant portion of the loan within a few years, due to business gains, inheritance, or sale of another property.
DTI for Conventional Loans
For a conventional loan, a debt-to-income ratio of up to 45% is usually considered acceptable. In exceptional cases, a DTI of up to 50% will be accepted by some lenders. This is usually in the case of large cash reserves and a high credit score.
This does not mean you will certainly be approved for a loan with a DTI of 45%. It means that your loan could be considered for approval with a DTI of 45% or 50% if the rest of your financial profile is solid.
Understanding your DTI ratio will help you set budgets and plan for your financial future. Understanding your DTI will prepare you to be in the best position for loan approval to purchase a new home, build a business, or take advantage of other growth opportunities.