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Debt to Income Ratio (DTI) is the percentage of your monthly gross income (Income) and your monthly expenses (debt).  The DTI is calculated by dividing your monthly debt payments by your monthly gross income.  The ratio is the percentage that lenders use to determine how credit worthy you are at repaying a loan.  The higher your DTI, the more you are financially viewed as a high-risk borrower.  To calculate your debt-to-income ratio, add up all of your monthly bills and then divide the sum by your monthly income.  For example:  Monthly Debt $1,500 divided by Gross Monthly Income, which is calculated as your annual gross income, $65,000 a year divided by 12 months is $5,416 a month. $5,416 is the Gross Monthly. ($1,500/$5,416=0.277), then convert the amount into a percentage and that is your DTI ratio.   

 

The types of debt that are usually included are: monthly payment amounts for rent/mortgage, car loan, credit cards, loans, and student loans.  Things like groceries, insurance, utilities, health care and day care payments are not included, so it is best that you keep them in mind, to be able to determine how much of a loan you really can afford to pay back.  The ideal front-end ratio should be more than 28% and the back-end ratio should be 36% or lower.  Some lenders will accept the DTI ratio as high as 45-50 percent.  That means that half of your monthly income is going toward housing expenses and recurring monthly debt obligations.  

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If your debt to income ratio is too high, you can lower it by keeping track of your spending by creating a budget and reduce unnecessary purchases, pay down your debt, think about considering debt consolidation, make your payments and do not get into debt again.  Avoid taking out more debt, because it will increase your DTI ratio and can lower your credit score.

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To learn more about Debt-To-Income Ratio, watch the YouTube video below:

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By Jason Torrents