Debt-to-income ratio calculator

A debt-to-income, or DTI, ratio is calculated by dividing your monthly debt payments by your monthly gross income. The ratio is expressed as a percentage, and lenders use it to determine how well you manage monthly obligations,  and if you can afford to handle additional debt.

Generally, lenders view consumers with higher DTI ratios as riskier borrowers because a lot of their incoming cash is already committed, so to speak, and they might run into trouble repaying a new loan — especially if something happens to jeopardize their income. 

There’s an extra wrinkle: Lenders look at two types of DTI ratios.

There are two components mortgage lenders use for a DTI ratio: a front-end ratio and back-end ratio. Here's a closer look at each and how they are calculated:

• Front-end ratio: also called the housing ratio, shows what percentage of your monthly gross income would go toward your housing expenses, including your monthly mortgage payment, property taxes, homeowners insurance and homeowners association dues. Because it focuses only on housing costs, this calculation is also known as the mortgage debt ratio.
• Back-end ratio: shows what portion of your income is needed to cover all of your monthly debt obligations, plus your mortgage payments and housing expenses. This includes credit card bills, car loans, child support, student loans and any other revolving debt that shows on your credit report. Because it looks at your full financial picture, this calculation is called the total debt ratio.

To calculate your DTI, add up all of your monthly debt payments, then divide by your monthly income. 

Here’s how to calculate your DTI.

• Total your regular monthly payments for such expenses as credit cards, student loans, personal loans, alimony or child support – anything that shows up on a credit report. If you’re applying for a mortgage, you also need to include the proposed monthly mortgage payment. If you’re taking the mortgage with a spouse or another co-borrower, include both partners’ debt payments.

• Divide that amount by the sum of your monthly gross income – that’s your paycheck (plus any other income you regularly receive) before deductions for taxes, retirement savings and other items.

Other monthly bills and financial obligations — utilities, groceries, insurance premiums, healthcare expenses, daycare, etc. — are not part of this calculation. Your lender isn't going to factor these budget items into their decision about how much money to lend you. However, you will have to keep your entire budget in mind when thinking about how much house you can afford. Just because you qualify for a $500,000 mortgage doesn't mean that you can actually make the monthly payment that comes with it.

Lenders typically say the ideal front-end ratio should be no more than 28 percent, and the back-end ratio, including all expenses, should be 36 percent or lower. In reality — depending on your credit score, savings, assets, down payment and the type of loan you're applying for — lenders may accept higher ratios.

For conventional loans backed by Fannie Mae and Freddie Mac, lenders now accept a DTI ratio as high as 50 percent. That means half of your monthly income is going toward housing expenses and recurring monthly debt obligations.

However, having a lower DTI ratio is better, no matter the type of mortgage. Borrowers with better financial profiles tend to receive better mortgage rates and other terms on their loans. And paying down debt will not only lower your DTI ratio, but it will also help boost your credit score. 

To get your DTI ratio under better control, use these four tips to pay down debt:

1. Track your spending by creating a budget — including all your expenses, no matter how big or small — and look for places to cut back in order to put more money toward paying down your debt.
2. Map out a plan to pay down your debts. Two popular ways for tackling debt include the snowball or avalanche methods. The snowball method involves paying down your smallest credit balance first while making minimum payments on others. Once the smallest balance is paid off, move to the next. The avalanche method, also called the ladder method, involves tackling the accounts with the highest interest rates first. Once you pay down the balance with the highest interest rate, move on the account with the second-highest rate, and so on.
3. Make your debt more affordable. If you have high-interest credit cards, call your credit card company to see if it can lower your interest rate. In some cases, it may be better to consolidate your credit card debt by transferring high-interest balances to an existing or new card that has a lower rate. You might also consolidate debt into a personal loan, especially if you can find one with a lower interest rate than you're currently paying.
4. Avoid taking on more debt. This is especially important before and during a home purchase. Not only will taking on new loans drive up your DTI ratio, it can hurt your credit score.