Your debt-to-income ratio is the percentage of your monthly income that goes toward debt payments
Your debt-to-income ratio (often called DTI) is a single number that lenders use to decide whether to lend you money. It compares how much you owe each month to how much you earn each month. If you earn $3,000 a month and your debt payments total $900 a month, your DTI is 30 percent.
Lenders care about this number because it shows them how much of your income is already spoken for. A high DTI means you have less room in your budget for a new loan payment. A low DTI means you have more breathing room. Most lenders want to see a DTI below 43 percent, though some will go higher and some will not.
Your DTI does not appear on your credit report. Lenders calculate it themselves when you explore for a loan, mortgage, or credit card. It is separate from your credit score, which measures your history of paying bills on time. You can have a good credit score and a high DTI, or a lower credit score and a low DTI.
Key Takeaways
- Your debt-to-income ratio is your total monthly debt payments divided by your gross monthly income, expressed as a percentage.
- Lenders use DTI to decide how much they will lend you and what interest rate they will charge, not to decide whether you are trustworthy.
- A DTI below 36 percent is generally considered good; above 43 percent makes most loans harder to get.
- Paying down existing debt or increasing your income both lower your DTI and improve your chances of being approved for new credit.
- Your DTI changes month to month as you pay down debt or take on new payments, so it is worth checking before you explore for a major loan.
How lenders calculate your debt-to-income ratio
Lenders add up all your monthly debt payments and divide by your gross monthly income — the money you earn before taxes. The debt payments they count include mortgage or rent (if you are renting, some lenders count this; others do not), car loans, student loans, credit card minimum payments, personal loans, and any other regular debt payment you have committed to.
The income they count includes your salary or wages, Social Security, pension payments, investment income, and any other regular money coming in. If you are self-employed or your income varies, lenders may average your income over the past two years or use your most recent year's tax return.
Here is a straightforward example: You earn $4,000 a month gross. Your mortgage payment is $1,200, your car payment is $350, and your credit card minimum is $100. That is $1,650 in monthly debt payments. Divide $1,650 by $4,000 and you get 0.4125, or 41.25 percent DTI.
Why lenders use DTI instead of just looking at your credit score
Your credit score tells a lender whether you have paid past debts on time. Your DTI tells a lender whether you have room in your budget to pay a new debt. These are two different questions. Someone with a perfect credit score might have a DTI so high that they cannot afford another payment. Someone with a lower credit score might have very little debt and plenty of income, making them a safer bet for a new loan.
Lenders use both numbers together. A high credit score and a low DTI is the strongest position. A low credit score and a high DTI is the weakest. The other two combinations — high score with high DTI, or low score with low DTI — fall somewhere in between, and the lender's decision depends on other factors like the size of the loan, the type of loan, and how much money you have saved.
What counts as a good debt-to-income ratio
Most lenders prefer to see a DTI of 36 percent or lower. This is sometimes called the 28/36 rule: no more than 28 percent of your income should go to housing costs, and no more than 36 percent should go to all debt combined. However, this rule is a guideline, not a law, and different lenders have different standards.
Many mortgage lenders will go up to 43 percent DTI, especially if you have a strong credit score and savings. Some credit card companies and personal loan lenders have no stated DTI limit. On the other hand, some lenders — particularly those offering the best interest rates — may want to see a DTI below 30 percent.
If your DTI is above 43 percent, most traditional lenders will turn you down for a mortgage or large loan. You may still be able to get a credit card or personal loan, but the interest rate will likely be higher. If your DTI is above 50 percent, you will have a very hard time borrowing money at any reasonable rate.
How to lower your debt-to-income ratio
You can lower your DTI in two ways: pay down debt or increase your income. Paying down debt is usually faster. If you pay off a car loan, that payment disappears from your DTI calculation when ready. If you pay off half your credit card balance, your minimum payment drops, which also lowers your DTI.
Increasing your income takes longer but has a lasting effect. If you get a raise, your DTI goes down without you having to pay off any debt. If you start receiving Social Security or a pension, that counts as income too. Even a part-time job or regular side income can move the needle, especially if your current income is low.
Some people focus on paying off high-interest debt first (like credit cards) because it saves them money on interest. Others focus on paying off the smallest balance first because it removes a payment from their DTI calculation faster. Both strategies work; the choice depends on your situation and what motivates you.
When lenders check your debt-to-income ratio
Lenders calculate your DTI when you explore for a mortgage, home equity loan, auto loan, personal loan, or sometimes a credit card. They do this near the end of the process process, after they have already checked your credit score and verified your income. If your DTI is too high, they may deny your process or offer you a smaller loan amount than you requested.
Your DTI can change between the time you explore and the time you close the loan. If you pay off a credit card or take out a new car loan in the meantime, your DTI will be different. Some lenders will recalculate it right before closing. This is why it is a good idea to avoid taking on new debt between the time you explore for a major loan and the time you close it.
If you are planning to explore for a mortgage or large loan, you can calculate your own DTI ahead of time to see where you stand. This gives you time to pay down debt if needed, or to understand what loan amount a lender might be willing to offer you.
Debt-to-income ratio and retirement income
If you are retired and living on Social Security, a pension, or investment income, your DTI is calculated the same way — your debt payments divided by your income. The difference is that your income is fixed and unlikely to increase. This means your DTI is harder to lower by earning more money.
For older adults, paying down debt before retirement can make a big difference. If you enter retirement with a mortgage, car payment, and credit card debt, your DTI may be high relative to your fixed income. If you enter retirement with no debt, your DTI is zero, and you have more flexibility to borrow if you need to.
Some lenders are more flexible with older adults on fixed income, especially if you have substantial savings or assets. Others are stricter because they know your income will not grow. It is worth shopping around and asking lenders directly how they treat retirement income when calculating DTI.
Frequently Asked Questions
Does my rent payment count toward my debt-to-income ratio?
It depends on the lender and the type of loan. Most mortgage lenders count rent as a debt payment when calculating DTI. Many personal loan and credit card lenders do not. When you explore for a loan, ask the lender directly whether they include rent in their DTI calculation.
If I pay off a credit card, does my DTI go down right away?
Yes, if you pay off the entire balance, that payment disappears from your DTI calculation. However, if you only pay down part of the balance, your minimum payment may not drop much. Lenders calculate your minimum payment as a percentage of your balance, so a smaller balance means a smaller minimum payment.
Can I have a high debt-to-income ratio and still get approved for a loan?
Yes, it is possible. If you have a strong credit score, substantial savings, or a co-signer with good income, some lenders will approve you even with a DTI above 43 percent. However, you will likely pay a higher interest rate. The larger the loan, the stricter lenders tend to be about DTI.
What is the difference between front-end and back-end DTI?
Front-end DTI counts only housing costs (mortgage or rent) divided by income. Back-end DTI counts all debt payments divided by income. Most lenders focus on back-end DTI, but mortgage lenders often look at both. Front-end DTI is usually lower than back-end DTI because it does not include car loans, credit cards, and other debts.
Does paying off debt hurt my credit score?
Paying off debt generally helps your credit score over time, though it may dip slightly in the short term if you close a credit card account. The benefit of a lower DTI and lower overall debt usually outweighs any small temporary dip. If you are planning to explore for a major loan soon, pay down debt but do not close accounts right before you explore.