Debt-To-Income Ratio (or DTI) is exactly what it sounds like: how much debt you have compared to how much you are earning each month. Knowing How To Figure Out Your Debt-To-Income Ratio can give you more information before you borrow money or decide how big a loan should be (especially since lenders will often give you WAY more money than you really need). Lenders use it in their decision-making processes when granting loans (especially mortgages).
It’s also a number you should know. You can watch it go down every month, and it should be a factor when you consider something like filing for bankruptcy.
How To Figure Out Your Debt-To-Income Ratio
Here is how you calculate DTI: take your monthly debt payments and divide it by your gross monthly income. You can probably find your monthly debt payments by looking at your bank statement. Here is a chart of debt you can use to see an example:
|Lender||Interest Rate||Balance Owed||Minimum Payment||Snowball Payment|
This chart makes monthly payments $764.84. We will round it up to $765. Let’s say your pay every month (before deductions are taken out) is $3,300. So $765/$3300 is .23181818 or 23%. That means your DTI is 23%!
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Your goal is to get your DTI as low as possible. If it’s too high, you are heading toward bankruptcy and no legitimate lender will give you a loan.
Also take into consideration your revolving debt. For example if you have a credit card with a $300 balance but a $5,000 limit a lender is going to see that as a potential $5,000 debt. So even debt you don’t have but COULD have can affect how a lender sees your DTI.
Lenders are squeamish about giving exact numbers, but when I worked in banking (and in my experience with my own mortgage) people usually liked numbers 40% and below. So that is a good gauge. If you can get your DTI to 40% or below you should be in a healthy place when you go to get a loan!
Laura M. Oliver is the author of Singles: Take Control of Your Own Financial Journey. It is available in paperback and Kindle on Amazon.