Debt-to-Income Ratio: What To Know

Credible takeaways

Your DTI can affect your ability to qualify for a loan.
Mortgage lenders prefer a DTI under 43%.
Personal loan lenders prefer a DTI less than 36%.
Calculate your DTI by dividing your total monthly debt payments by your gross monthly income.

If you’ve ever struggled to find the money to pay off monthly debt obligations, you may know what it’s like to have a high debt-to-income ratio (DTI). Your DTI measures your debt payments compared to your income, and it plays a big role in your ability to qualify for a loan.

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What is the debt-to-income ratio (DTI)?

Your DTI expresses how much of your monthly income you spend on debt payments. The higher your DTI, the less money you have to save or spend on things you want. Meanwhile, a lower DTI signals a more flexible budget — it shows you have little debt in relation to your income, a relatively high income (in relation to your debt), or both.

Often, you’ll hear about DTI as it relates to qualifying for a loan. Many lenders consider your DTI when reviewing your application. From a lender’s perspective, borrowers with lower DTIs are less risky to work with.

How to calculate DTI

To calculate your DTI, start by adding up your monthly debt payments. This should include payments on your mortgage or rent, car loans, student loans, personal loans, and minimum credit card payments. Then, calculate your gross monthly income. This is your monthly pay before taxes and deductions. Add up all your income sources if you have more than one.

Finally, divide your total monthly debt by your gross monthly income.

For example, let’s say you have a $2,500 mortgage, a $200 student loan payment, and $300 worth of minimum credit card payments due each month. Your total monthly debt payments add up to $3,000. Your full-time job pays you $6,000 per month before taxes. You also earn an extra $2,000 per month from a second job on the weekends. In total, your gross income is $8,000 per month.

In this case, you would divide $3,000 by $8,000, which equals 0.375 or about 38%.

Related: Ways To Pay Off Debt Fast

Good to know

If you're seeking a personal loan, lenders generally prefer a DTI less than 36%, while mortgage lenders prefer a DTI under 43%. The lower your DTI, the better.

How to understand your DTI

Your DTI matters to lenders when you apply for a loan. Lenders want to know that you’re not overextending yourself by putting too much of your income toward debt. A high DTI could signal that your financial situation is vulnerable, or that you’re unable to afford another loan. Even if a lender is willing to approve your loan with a high DTI, it may raise your rate to compensate for the perceived risk.

On the other hand, having a lower DTI means you’re more likely to qualify for a loan — and more likely to get a low rate. If you know your DTI ahead of time, you can take steps to lower it, if needed, which could save you a lot of money on a mortgage or a personal loan.

Calculating your DTI can also give you an objective view of your financial picture. If things feel tight, finding out you have a high DTI may explain why.

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What DTI do lenders want to see?

DTI requirements vary by lender. Generally, mortgage lenders are a little more flexible. Though they prefer a DTI less than 43%, some lenders may consider a higher DTI, depending on other factors of your loan application, such as an excellent credit score. In part, this is because a mortgage is a secured loan, which means that if you default on the mortgage, the lender can foreclose on your home to recoup its losses.

For unsecured loans, like personal loans, you typically need a lower DTI. Most personal loan lenders prefer a DTI below 36%. A DTI in this range, along with a good credit and stable income, can help you qualify for optimal APRs. But that doesn’t mean lenders won’t accept borrowers with higher DTIs.

It's best to prequalify before applying to see what rates and terms you may be approved for. Prequalification won't hurt your credit, but it's also not an offer of credit. And when you formally apply for a loan, the lender will conduct a hard credit pull which could temporarily ding your score.

Learn More: Does Applying for a Loan Hurt Your Credit Score?

How can I lower my DTI?

Because your DTI depends on two factors, there are two ways of lowering your DTI: decrease your debt, or increase your income. (Though you could of course do both.)

Paying off debt may take some time, especially if you have a lot of high-interest debt. If you’re intent on reducing it, there are two popular debt repayment strategies that can help: the snowball method and the avalanche method.

Debt snowball method: This strategy has you pay off your smallest debt first while making minimum payments on all other debts. When you finish paying off your smallest debt, you apply the previous debt’s monthly payment to the next-smallest debt, and so on. This strategy may keep you motivated with quicker wins upfront, but isn’t typically the fastest way to pay off debt.
Debt avalanche method: This strategy has you pay off your highest-interest debt first while making minimum payments on everything else. When you finish paying off your highest-interest debt, you prioritize the debt with the next-highest rate, and so on. Using this strategy may take longer to pay off that first account, but it can actually help you pay off debt faster, saving you money on interest.

Let’s say you use one of these debt paydown methods to eliminate all of your credit card debt, and your total debt payments shrink from $2,000 to $1,200 per month, for example. If you earn $5,000 per month before taxes, your DTI would drop from 40% to 24%.

The other way to lower your DTI is to earn more money, which is certainly easier said than done. But there are some ways you may be able to boost your income and lower your DTI, including:

Negotiate a raise: If it’s been a while since you got a raise, do some research to make sure you’re receiving fair pay — then present your request along with compelling data and evidence.
Earn rental income: If you have a garage apartment, in-law suite, or even an empty bedroom in your house, you may be able to rent it out for supplemental monthly income.
Start a side hustle: Both product and service-based businesses make great side hustles. You’ll need an in-demand skill, a customer base, and a little bit of time.

Say you’re able to earn an extra $2,000 per month between renting out a bedroom and taking on a side hustle. Your income from the previous example would jump from $5,000 to $7,000. With monthly debt payments of $2,000, your DTI would drop from 40% to just over 28%.

How to consolidate debt with a high DTI

Consolidating debt can benefit your finances in several ways. Not only can it streamline debt payoff, it can also save you money.

Debt consolidation requires getting a new loan to pay off your existing debts, but qualifying for a debt consolidation loan with a high DTI can be tough. Fortunately, there are a few ways to make consolidating debt with a high DTI easier:

Take out a secured debt consolidation loan: Secured loans require you to put up collateral, so they’re generally easier to qualify for than unsecured loans. As long as you’re comfortable using an asset as collateral, like your house or car, consider using a secured loan like a secured personal loan or a home equity loan to consolidate your debt. If you miss payments, however, the lender can take your collateral.
Apply with a cosigner: A cosigner with a solid borrowing history and strong income can make your loan application more attractive to lenders. Applying for a loan with a cosigner can help you qualify for a loan when you can’t on your own. A cosigner shares responsibility for the loan; any late payments you make could ding their credit, and if you default, they'll have to take over payments. So make sure you can comfortably afford the monthly payments first.
Focus on lowering your DTI before applying for a new loan: If you can’t qualify for an affordable loan, it may be worth paying off some of your debt first. This can lower your DTI and make it easier to qualify for a debt consolidation loan, which can then accelerate your debt payoff progress.
Use a balance transfer credit card: If you’re confident you can pay off your debt within a relatively short period of time, using a balance transfer credit card can be a smart way to do it. Some cards offer a 0% APR introductory offer on balance transfers, usually from 6 to 21 months. If you can pay off your debt within the introductory period, you can do so without incurring interest — but you’ll typically have to pay a balance transfer fee, which often ranges from 3% to 5%.

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FAQ

What is a good DTI?

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It depends on the type of loan you're applying for. A DTI of 35% or less can put you in a good position for a number of different loan types.

A low DTI shows lenders you have room in your budget to take on more debt without overextending yourself. But different lenders have different DTI requirements, and secured loans, like mortgages and auto loans, tend to allow for higher DTIs.

Does your DTI affect your credit score?

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Your DTI doesn’t directly affect your credit score. Instead, your payment history, amounts owed, length of credit history, new credit, and credit mix do.

If your DTI is so high that you’re unable to keep up with payments, however, it can indirectly affect your credit.

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Meet the expert:

Emily Batdorf

Emily Batdorf is a personal finance expert who specializes in banking, lending, credit cards, and budgeting. Her work has been featured by USA TODAY Blueprint, the New York Post, MSN, and Forbes Advisor.