What It Means
Your debt-to-income ratio (DTI) is the share of your gross monthly income that goes to debt payments. The Consumer Financial Protection Bureau (CFPB) describes the math: add up every monthly debt payment and divide by your income before taxesGross incomeThe full amount you earn before taxes and other deductions come out. For federal taxes, it's all income you receive unless a law exempts it. See more and other deductions. Lenders use the result as one way to judge whether you can afford the payment on a new loan.
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At or under 43%. The CFPB notes some lenders will go up to 43% or higher, and each lender and loan program sets its own limit.
Above 43%, the level the CFPB says some lenders will go up to. Paying off a debt or raising income brings the number down.
How People Say It
- "The lender said our DTI was too high."
- "If we pay off the car first, our debt-to-income drops a lot."
- "What's your DTI with the new mortgage in it?"
The Breakdown
The formula
DTI = total monthly debt payments ÷ gross monthly income × 100
Worked example. Maya earns $6,000 a month before taxes. Her monthly debt payments:
| Payment | Amount |
|---|---|
| MortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more | $1,500 |
| Car loanCar loanAn installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral. See more | $350 |
| Student loanStudent loanMoney borrowed to pay for college or career school, repaid with interest after you leave school; it comes from the federal government or a private lender. See more | $200 |
| Credit card minimums | $100 |
| Total | $2,150 |
$2,150 ÷ $6,000 = 0.358, a DTI of 35.8%.
What the result means. About 36 cents of every pre-tax dollar Maya earns is already committed to debt. If she paid off the car loan, her payments would fall to $1,800 and her DTI to 30%. The CFPB's own example works the same way: $2,000 in payments on $6,000 of gross income is a 33% ratio.
What goes in. The CFPB's formula counts monthly debt payments, so everyday costs such as groceries and utilities stay out. Use gross income, before taxes and deductions; using take-home payTake-home payThe money that actually reaches you from a paycheck after taxes and other deductions are taken out, also called net pay or net income. See more instead gives a higher ratio than a lender would calculate.
Good to Know
There's no single cutoff that fits every loan. The CFPB notes that some lenders will go up to 43% or higher, and loan programs set their own rules: Fannie Mae, for example, sets debt-to-income requirements for the mortgages it buys in section B3-6-02 of its Selling Guide. DTI is one way lenders measure whether you can manage a new payment, as the CFPB describes it, so it's read alongside the rest of your application. Ask the lender how it counts your income and payments before you apply.
FAQ
What is a good debt-to-income ratio?
A lower ratio leaves more room, and there's no one number for every lender. The CFPB notes that some lenders will go up to 43% or higher, while each lender and loan program sets its own limit.
Is debt-to-income based on gross or net income?
Gross. The CFPB defines it as your monthly debt payments divided by your gross monthly income, the amount earned before taxes and other deductions come out.
How can I lower my debt-to-income ratio?
Lower your monthly debt payments, raise your gross income, or both. Paying a debt off removes its payment entirely, while stretching a loan over a longer term lowers the payment but adds interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more over time.
Do It in Buhata
Debt Payoff, Budget
Keep each monthly debt payment as a repeating entry in Budget, and with Premium use Debt Payoff to see which card to clear first.
Open BuhataRelated Terms and Categories
- Mortgage
A loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term.
- Gross income
The full amount you earn before taxes and other deductions come out. For federal taxes, it's all income you receive unless a law exempts it.
- Car loan
An installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral.
- Student loan
Money borrowed to pay for college or career school, repaid with interest after you leave school; it comes from the federal government or a private lender.
- Credit score
A three-digit number calculated from your credit report that lenders use to judge how likely you are to repay; common models run from 300 to 850.
Sources
Consumer Financial Protection Bureau, "What is a debt-to-income ratio?"; Fannie Mae Selling Guide, "B3-6-02, Debt-to-Income Ratios"
- www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791
- selling-guide.fanniemae.com/sel/b3-6-02/debt-income-ratios
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