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Debt-to-income ratio (DTI) divides the total of all monthly debt payments by gross monthly income, giving you a percentage. Here’s what you should know:
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To calculate your DTI, enter the payments you owe, such as rent or mortgage, student loan and auto loan payments, credit card minimums and other regular payments. Then, adjust the gross monthly income slider.
Here’s an example: A borrower with rent of $1,000, a car payment of $300, a minimum credit card payment of $200 and a gross monthly income of $6,000 has a debt-to-income ratio of 25%.
A debt-to-income ratio of 20% or less is considered low. The Federal Reserve considers a DTI of 40% or more a sign of financial stress.
Lenders look at debt-to-income ratios because research shows borrowers with high DTIs have more trouble making their payments.
Each lender sets its own debt-to-income ratio requirement. Not all creditors, such as personal loan providers, publish a minimum debt-to-income ratio, but generally it will be more lenient than for, say, a mortgage.
Note that a debt-to-income ratio of 43% is generally the highest mortgage lenders will accept for a qualified mortgage, which is a loan that includes affordability checks.
You may find personal loan companies willing to lend money to consumers with debt-to-income ratios of 50% or more, and some exclude mortgage debt from the DTI calculation. That’s because one of the most common uses of personal loans is to .
The required varies by lender but generally, lenders look for DTIs of 50% or lower.
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Your debt-to-income ratio does not affect ; credit-reporting agencies may know your income but do not include it in their calculations.
But your credit-utilization ratio, or the amount of credit you’re using compared with your credit limits, does affect your credit scores. Credit reporting agencies know your available credit limits, both on individual cards and in total, and most experts advise keeping the balances on your cards no higher than Lower is better.
To reduce your debt-to-income ratio, you need to either or reduce the monthly payments you owe.
Your DTI can help you determine how to handle your debt and whether you have .
Here’s a general rule-of-thumb breakdown: