Calculate Debt to Income Ratio - DTI Ratio
Find out more about how to calculate your debt to income ratio for 2020. Just follow these simple steps for a clearer outlook on your finances.
On this page, we will teach you how to calculate your debt-to-income ratio (DTI ratio). This will allow you to be more knowledgeable about your income and expenses each month. Take control of your debt and understand better how the money lenders come up with their numbers. All you need to do is a simple calculation to work out your debt to income ratio and be better prepared to deal with your debts.
What Is a Debt to Income Ratio?
Debt to income (DTI) ratio is a personal figure that tells you how much of your income is used to pay off your debt as a percentage. This is not the same as your credit utilization, which is representative of the amount of debt you have concerning your credit card and line of credit limits.
Your debt-to-income ratio is used by money lenders, particularly mortgage and auto lenders, to establish a loan amount that is affordable to you. This will be based on both your current income and the amount of debt you already have.
As an example, mortgage lenders can use your debt-to-income ratio to decide what mortgage payment you could afford after you pay your other monthly debts.
It’s straightforward to work out your debt-to-income ratio. This will help you to know the percentage of your income that’s used to pay your debts each month.
1. Calculate Your Monthly Debt
The way to find your debt-to-income ratio is by dividing your monthly income by the amount you pay towards your debts per month.
DTI = monthly debt / monthly income
The first thing we need to do to calculate the debt-to-income ratio is to work out your total debt payments per month. We can do this calculating monthly debt payments, including the following:
- Rent or mortgage
- Minimum credit card payments
- Car loans
- Personal loans
- Student loans
- Alimony/child support payments
- Any other loans or lines of credit
Let’s assume that Mary has the following debt expenses each month:
- Mortgage = $950
- Minimum credit card payment = $235
- Car loan = $355
$950 + $235 + $355 = $1,540. This is Mary’s total monthly debt payment.
We don’t need to include payments that aren’t involved with financing. This would be things like utilities, groceries, and insurance. As a general rule, if it’s not included in your credit report, then it won’t be covered by lenders when they consider your debt-to-income ratio.
2. Calculate Your Monthly Income
The next step in the calculation is your total monthly income. For this, you need to add up the amount you receive each month from the following sources:
- Gross income from a W-2 job or self-employment
- Bonuses or overtime
- Alimony/child support
- Other income from any additional sources
Mary is spending $1,540 a month on debt payments. Her monthly income is as follows:
- Gross monthly income = $3,500
- Child support = $500
$3,500 + $500 = $4,000. This is Mary’s total monthly income.
Note: To calculate from a weekly income, multiply by 52 and divide by 12. For bi-weekly, multiply by 26 and divide by 12. This will give you your monthly income. If you only know your gross annual salary, then divide by 12 to find the amount per month.
3. Time to Do the Math
Once we’ve calculated both the total monthly debt and the total monthly income, we have all the numbers we need for our debt-to-income ratio calculator. To calculate the actual ratio, we need to divide the monthly debt payments by the monthly income. Once we have the result, we multiply by 100 to yield the percentage.
From our earlier example, Mary had a total of $1,540 for her monthly debt payments and a gross monthly income of $4,000. So we need to divide $1,540 by $4,000 and then times by 100 for the percentage.
$1540 / $4000 = 0.385 x 100 = 38.5%
Mary’s debt-to-income ratio is 38.5%.
What Does Your Debt to Income Ratio Mean?
The percentage you have calculated for yourself will correspond to one of the following categories:
36% or less is an outstanding debt to income ratio to have. If your percentage lies in this range, it’s advisable not to incur more debt in order to keep your rate at a manageable level. You may struggle to gain mortgage approval if your ratio is above this amount.
37% to 42% isn’t necessarily a bad ratio, but you could try to improve on it. If your percentage is in this area, you should try to reduce some of your debt.
43% to 49% is a ratio which suggests you may fall into some financial trouble. It would help if you tried to pay off your debt faster to prevent a situation of overloaded debt.
50% or more is a very precarious situation to be in. This DTI ratio means that more than half of your monthly income is going towards paying your debts. You should start paying off as much of your debt as possible. Don’t hesitate to get professional help. You may want to consider a Debt Consolidation Loans, which will allow you to combine all of your liabilities into a single payment each month. You may even be able to get a lower interest rate than you have on some of your other loans.
Mary had a debt-to-income ratio of 38.5%. This isn’t a bad ratio, but it would be inadvisable for her to increase her debt without an increase in her monthly income.