Quick answer: Debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward monthly debt payments. To calculate it, add your qualifying monthly debt payments, divide the total by your gross monthly income, and multiply by 100.
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
For example, $2,000 in monthly debt payments divided by $5,000 in gross monthly income produces a DTI of 40%. Lenders can use DTI as one part of a credit or loan application, but requirements vary by lender and loan type.
What Is Debt-to-Income Ratio?
Debt-to-income ratio, commonly called DTI, is a percentage that compares your monthly debt obligations with your gross monthly income.
Lenders can use DTI to help evaluate whether you have enough income relative to your existing monthly obligations to take on another payment. It is one factor among others that can be considered during a credit application.
DTI can also be useful even when you are not applying for a loan. Calculating it can give you a clearer picture of how much of your income is already committed to debt payments.
Debt-to-Income Ratio Formula
The basic DTI formula is:
DTI = (Monthly Debt Payments ÷ Gross Monthly Income) × 100
The most important part is making sure the two numbers are measured consistently. DTI generally compares monthly debt payments with gross monthly income.
Example
$2,000 of debt payments and $5,000 of gross income
Suppose your monthly qualifying debt payments total $2,000 and your gross monthly income is $5,000.
($2,000 ÷ $5,000) × 100 = 40%
Your DTI would be 40%.
How to Calculate Your DTI Step by Step
- Calculate your gross monthly income. Start with income before federal and state taxes, retirement contributions, health insurance and other payroll deductions.
- List your monthly debt payments. Add the payments that are included under the DTI method relevant to the lender or loan you're considering.
- Add the monthly debt payments together. Your total might include a mortgage or rent obligation, auto loans, student loans, credit card payments and other recurring debt obligations, depending on the calculation.
- Divide debt payments by gross monthly income. This produces a decimal.
- Multiply by 100. The result is your DTI percentage.
What Income Is Used for DTI?
DTI generally uses gross monthly income, which is income before taxes and other deductions.
If you receive a salary, a simple starting point is to divide annual gross salary by 12.
Annual Gross Salary ÷ 12 = Gross Monthly Income
Salary example
If your annual gross salary is $72,000:
$72,000 ÷ 12 = $6,000 gross monthly income
If your qualifying monthly debt payments are $1,800:
($1,800 ÷ $6,000) × 100 = 30%
Your DTI would be 30%.
People with hourly, commission, bonus, self-employment or multiple income sources may need additional documentation or calculations when applying for credit. A lender may use rules specific to the loan program when determining qualifying income.
What Counts as Debt in DTI?
The exact debts included can vary depending on the lender and type of loan. Common monthly obligations considered in DTI calculations can include:
| Payment | Commonly considered? |
|---|---|
| Mortgage payment | Generally included when applicable. |
| Auto loan | Generally included. |
| Student loan | Generally included, subject to lender rules. |
| Credit card payment | Generally included; the applicable monthly payment may depend on lender rules. |
| Personal loan | Generally included. |
| Child support or alimony | May be included depending on the lender and applicable underwriting rules. |
| Utilities | Generally not included in a standard consumer DTI calculation. |
| Groceries | Generally not included. |
| Entertainment | Generally not included. |
This table is a general guide, not a universal underwriting rule. A lender can use its own definitions and loan-program requirements.
Front-End DTI vs. Back-End DTI
You may encounter two DTI measurements, especially when researching mortgages: front-end DTI and back-end DTI.
| Type | What it measures |
|---|---|
| Front-end DTI | Housing-related costs as a percentage of gross monthly income. |
| Back-end DTI | Broader monthly debt obligations as a percentage of gross monthly income. |
For mortgage applications, housing costs can include more than the principal and interest portion of a mortgage. Depending on the loan calculation, property taxes, homeowners insurance, mortgage insurance, association dues and other housing-related obligations may be considered.
Back-end DTI generally looks at the broader set of recurring debt obligations. When people discuss DTI without specifying a type, they are often referring to the broader back-end ratio.
What Is a Good Debt-to-Income Ratio?
There is no single DTI percentage that guarantees approval or represents a universal cutoff for every loan. Lenders and loan programs can use different standards.
In general, a lower DTI means a smaller share of gross income is committed to debt payments. Lenders may view that as relevant when assessing the ability to handle an additional obligation.
These percentages are illustrations rather than approval categories. For example, Wells Fargo currently describes 35% or less as a range it views favorably in its own educational DTI guidance, while also noting that lenders may have additional eligibility requirements. Other lenders and loan programs can use different thresholds.
How Do Lenders Use DTI?
DTI helps a lender compare your existing monthly obligations with your income. It can provide information about how much of your gross income is already committed to debt payments.
A lender may consider DTI alongside other information, such as your credit history, credit score, income stability, assets, loan amount, collateral and the characteristics of the loan being requested.
DTI therefore should not be viewed as a standalone measure of creditworthiness.
DTI vs. Credit Score
| DTI | Credit score |
|---|---|
| Compares monthly debt payments with gross monthly income. | A numerical score generated from credit-report information using a scoring model. |
| Primarily reflects the relationship between debt obligations and income. | Reflects credit-history information used by a particular scoring model. |
| Can change when income or monthly debt obligations change. | Can change as information on your credit reports changes. |
| Not generally displayed as a standard number on your credit report. | Can be calculated from information in your credit report. |
DTI vs. Credit Utilization
DTI and credit utilization are also different measurements.
DTI compares monthly debt payments with gross income. Credit utilization compares revolving credit balances with available credit limits.
$2,000 credit card balance ÷ $10,000 credit limit = 20%
Someone can therefore have a relatively low DTI but high credit utilization, or a relatively high DTI while maintaining lower utilization on individual credit cards.
How to Lower Your Debt-to-Income Ratio
Your DTI can generally improve in two broad ways: reducing the monthly debt payments included in the calculation or increasing qualifying gross income.
- Pay down debt. Reducing a debt balance can eventually reduce the required monthly payment, depending on the account.
- Avoid taking on unnecessary new debt. A new monthly payment can increase the numerator in your DTI calculation.
- Review recurring debt obligations. Make a complete list of your monthly payments so you know exactly what is affecting your ratio.
- Increase income when possible. A higher qualifying gross monthly income can reduce DTI if your monthly debt payments remain unchanged.
- Consider refinancing or consolidation carefully. A different loan may change your monthly payment, but it can also change the interest rate, fees, repayment period and total cost of borrowing.
- Check the lender's calculation. If you are preparing for a loan application, ask which income sources and debt payments the lender will include.
How Increasing Income Changes DTI
Increasing gross monthly income can lower your DTI when your monthly debt payments stay unchanged.
Same debt, different income
Suppose your monthly debt payments are $2,000.
At $5,000 gross monthly income:
$2,000 ÷ $5,000 × 100 = 40%
At $6,000 gross monthly income:
$2,000 ÷ $6,000 × 100 ≈ 33.3%
The debt payments did not change, but the ratio decreased because gross income increased.
How Paying Down Debt Changes DTI
Paying down debt can improve DTI, but the effect depends on which debt is reduced and how the lender calculates the monthly obligation.
For example, completely paying off a loan can eliminate its required monthly payment from a DTI calculation. Making an extra payment toward a revolving credit card may reduce the balance without immediately changing the minimum payment used by a particular lender.
If you're preparing for a specific application, ask the lender how it treats recently paid-down or closed accounts.
DTI and Mortgage Applications
DTI is particularly relevant to mortgage underwriting because lenders need to evaluate whether the proposed housing payment fits with the borrower's existing obligations.
Mortgage calculations can distinguish between housing-related DTI and total debt obligations. Different mortgage programs can also have different underwriting requirements.
The CFPB explains that different loan products and lenders can have different DTI limits. Federal mortgage rules also do not establish one universal DTI threshold for every transaction; underwriting requirements depend on the applicable rules and lender.
How a New Loan Can Affect Your DTI
When you apply for a loan, the lender may calculate your DTI using existing obligations plus the proposed new payment.
Example with a proposed new payment
Imagine you currently have:
- $1,200 mortgage payment
- $350 auto loan
- $150 student loan
- $100 credit card payment
Your current monthly debt payments are $1,800.
If a proposed loan would add another $300 monthly payment, the lender could potentially evaluate $2,100 of monthly obligations, depending on the applicable underwriting method.
With $6,000 of gross monthly income:
$2,100 ÷ $6,000 × 100 = 35%
Common DTI Calculation Mistakes
DTI for Self-Employed Borrowers
Self-employed borrowers can face additional income-documentation requirements. The income amount used for underwriting may not simply equal gross business revenue.
A lender can review tax returns, financial statements and other documentation according to its underwriting rules. If you are self-employed and preparing for a loan, ask the lender how it will calculate qualifying income before estimating your DTI.
Why Your DTI Matters Even If You're Not Borrowing
DTI can be useful as a personal financial measurement because it shows how much of your gross income is already committed to recurring debt payments.
For example, if your income increases but your debt payments remain unchanged, your DTI can fall. If you take on a new auto loan or personal loan, your DTI can rise.
Tracking the ratio over time can therefore help you see how borrowing and income changes affect your overall debt burden.
Quick DTI Check
Use these three numbers
- Your gross monthly income
- Your total qualifying monthly debt payments
- Your resulting DTI percentage
Monthly Debt ÷ Gross Monthly Income × 100 = DTI
If you are preparing for a particular loan, compare your personal calculation with the lender's definition of qualifying income and debt.
Frequently Asked Questions
What is a debt-to-income ratio?
DTI is the percentage of your gross monthly income that goes toward monthly debt payments. It is calculated by dividing monthly debt obligations by gross monthly income and multiplying by 100.
How do I calculate my DTI?
Add your qualifying monthly debt payments, divide that amount by your gross monthly income, and multiply the result by 100. For example, $2,000 of debt payments divided by $5,000 of gross monthly income equals 40%.
Does DTI use gross or net income?
Standard DTI calculations generally use gross monthly income, meaning income before taxes and other deductions. Specific lender underwriting rules can differ.
Is a 30% DTI good?
A 30% DTI means that 30% of gross monthly income is going toward the debt payments included in the calculation. Whether that meets a lender's requirements depends on the lender, loan type and other application factors.
Is a 40% DTI too high?
There is no universal answer. A 40% DTI means 40% of gross monthly income is committed to included debt payments. Some lenders or loan programs may permit a ratio at that level, while others may have different requirements.
What is the difference between front-end and back-end DTI?
Front-end DTI focuses on housing-related costs, while back-end DTI generally considers a broader set of monthly debt obligations. Mortgage lenders may consider both.
Does rent count toward DTI?
It can, depending on the lender and calculation being used. Housing costs are commonly relevant when evaluating housing affordability and mortgage applications. Ask the lender which housing payment definition applies to your situation.
Does DTI affect my credit score?
DTI itself is not generally a component of standard credit scoring models. However, high debt obligations can make it harder to keep up with payments, and missed payments can affect your credit history.
Does credit utilization affect DTI?
They measure different things. Credit utilization compares revolving balances with credit limits, while DTI compares monthly debt payments with gross monthly income.
Can I lower my DTI by increasing my income?
Yes. If your monthly debt payments remain unchanged, a higher qualifying gross monthly income lowers the ratio. Whether a particular type of income qualifies for underwriting depends on the lender's rules.
Can paying off a loan lower my DTI?
It can if paying off the loan removes its monthly payment from the calculation. The exact treatment of recently paid debts can depend on the lender and loan program.
Do utilities count in DTI?
Utilities are generally not included in standard DTI calculations used for many consumer loans. Lenders can have different underwriting rules, so verify the requirements for your specific application.
Related Credit & Debt Guides
Sources Used for This Guide
This educational guide was informed by consumer-finance resources from the Consumer Financial Protection Bureau, Wells Fargo, U.S. Bank, Sallie Mae, Bankrate and Experian.
DTI definitions and underwriting calculations can vary by lender, loan type and circumstances. For a specific application, use the lender's current requirements.