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.

• 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.
• 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.

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 – basically anything that shows up on a credit report. If you’re applying for a mortgage, you also need to add the proposed monthly mortgage payment into this total. 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 on how much money to lend you. Keep in mind that just because you qualify for a $300,000 mortgage, that doesn't mean you can actually afford the monthly payment that comes with it when considering your entire budget.

To get your DTI ratio under better control, focus on paying down debt with these four tips.

1. Track your spending by creating a budget, and reduce unnecessary purchases to put more money toward paying down your debt. Make sure to include all of your expenses, no matter how big or small, so you can allocate extra dollars 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 small credit balance first while making minimum payments on others. Once the smallest balance is paid off, you move to the next. The avalanche method, also called the ladder method, involves tackling accounts based on higher interest rates. Once you pay down a balance that has a higher-interest rate, you move on the next account with the second-highest rate and so on.
3. Make your debt more affordable. If you have high-interest credit cards, look at ways to lower your rates. To start, call your credit card company to see if it can lower your interest rate. In some cases, you may realize it's better to consolidate your credit card debt by transferring high-interest balances to an existing or new card that has a lower rate. Taking out a personal loan is another way you could consolidate high-interest debt into a loan with a lower interest rate and one monthly payment to the same company.
4. Avoid taking on more debt. Don't make large purchases on your credit cards or take on new loans for major purchases. 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.