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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:
Lenders use DTI — along with credit history — to evaluate whether a borrower can repay a loan.
Each lender sets its own DTI requirement.
Personal loan providers generally allow higher DTIs than mortgage lenders.
» MORE: Check out more financial calculators on NerdWallet
How to calculate your debt-to-income ratio
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.
A debt-to-income ratio of 20% or less is considered low.”
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.
» MORE: Get help lowering your DTI
How lenders view your debt-to-income ratio
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 consolidate credit card debt.
The required debt-to-income ratio for student loan refinancing varies by lender but generally, lenders look for DTIs of 50% or lower.
» MORE: Learn how to pay off debt in three steps
Does your DTI affect your credit score?
Your debt-to-income ratio does not affect your credit scores; credit-reporting agencies may know your income but do not include it in their calculations.
To reduce your debt-to-income ratio, you need to either make more money or reduce the monthly payments you owe.”
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 30% of your credit limit. Lower is better.
To reduce your debt-to-income ratio, you need to either make more money or reduce the monthly payments you owe.
What your debt-to-income ratio means for your debt
Your DTI can help you determine how you should handle your debt and whether you have too much debt.
Here’s a general rule-of-thumb breakdown:
DTI of 15% to 39%: If you have primarily credit card debt, look into a debt management plan from a nonprofit credit counseling agency. You may also want to consider credit card debt consolidation. If you are closer to the higher end of this range, seek a free consultation with a nonprofit credit counselor and a bankruptcy attorney to understand all of your debt relief options.
DTI of 40% or more: Look into debt relief options, such as bankruptcy.