A financial metric called the debt-to-income ratio measures your monthly debt payments against your gross (pre-tax) monthly income. It’s a way for lenders to evaluate a borrower’s ability to manage monthly payments and repay debts. The lower your debt-to-income ratio, the better you’re balancing what you owe with what you make.
You’ll often see debt-to-income abbreviated as DTI, and there are two different types: front-end and back-end. Front-end DTI calculates the portion of income borrowers use for housing expenses, including things like rent or mortgage payments, property taxes, and homeowners insurance. Back-end DTI is the percentage of income borrowers spend on all other recurring debts, like car payments,
credit card payments, and student loans.
Your debt-to-income ratio plays a big role in your ability to get loans and stay financially stable. So let’s look at how to calculate yours — and how to keep it on track.
How to calculate your debt-to-income ratio
To calculate your DTI, add up all your monthly debt payments, including credit cards, car loans, student loans, and housing costs like rent. If you have a mortgage, remember that your front-end DTI includes all your monthly housing-related expenses, so if your mortgage payment doesn’t include property taxes or homeowners insurance, add those in. And if you’re part of a homeowner’s association, you’ll need to include those fees, too.
Once you’ve added up the debts you pay each month, divide the total by your gross monthly income. Then, multiply the result by 100 to get a percentage.
Let’s say your gross monthly income is $5,000 and you have $2,000 in monthly debts. Your debt-to-income ratio calculation would look like this:
DTI = (2000 / 5000) × 100 = 40%
That 40% DTI means that 40% of your gross income goes toward paying debts each month.
What’s a good debt-to-income ratio?
How you define a “good” DTI ratio depends on your financial goals, but lower is always better. Here’s how most lenders evaluate a DTI.
Excellent DTI. Below 36% is what most lenders consider ideal because it shows the borrower has a strong ability to manage debt.
Acceptable DTI. Between 36% and 43%. Falling within this range will still often allow you to qualify for loans, but lenders might have doubts about your financial stability.
High DTI. Over 43%. Anything above that number is usually a red flag, which could affect a borrower’s ability to get credit or take out a loan.
Impressing lenders isn’t the only reason to aim for a low DTI. It’s also a smart personal goal because it means you have the financial flexibility to handle unexpected expenses.
The debt-to-income ratio in action
Let’s consider some examples. Angie is a customer support specialist who earns $48,000 a year ($4,000/month before taxes and deductions). Angie’s monthly debt obligations include:
Angie’s monthly debt payments total up to $1,725. With that number in hand, she can use the debt ratio formula to calculate her DTI:
DTI = (1725 / 4000) x 100 = 43%
Angie’s 43% DTI means she’s right at the top end of the “acceptable” range. She might still qualify for loans, but lowering her DTI ratio will put her in a better financial position.
How to lower your debt-to-income ratio
If your DTI is higher than you’d like, use these steps to help bring it back down.
1. Pay off your smallest individual loans
Start by tackling your smallest loans. Paying off these debts frees up cash for other financial goals — and it’ll make you feel good, too, which can motivate you to continue reducing your debt.
2. Reduce your credit card interest
High-interest credit card debt is one of the fastest ways to lose control of your DTI. Look for ways to reduce your interest, like consolidating debt to a balance transfer card with a 0% introductory rate. If a balance transfer isn’t an option, focus on paying down the cards with the highest interest rate first.
3. Increase your income
This probably goes without saying, but increasing
your income can do great things for your DTI. Try negotiating a raise or taking on a side gig to bring in some extra cash — just be sure to use your new income to tackle existing debts before taking on new ones.
4. Take fewer deductions
If you’re a salaried or hourly employee who gets a paycheck from an employer, you can increase your take-home pay by adjusting your tax withholdings. Reducing the number of deductions on your W-4 form means your employer withholds less money for taxes, leaving you with a larger paycheck each pay period.
But be cautious with this approach. If you lower your deductions too much, you could wind up owing a lot of money at tax time. Talk to a tax advisor or use an online withholding calculator from the IRS so you don’t get stuck with a
surprise bill.
5. Refinance your loans
Refinancing means changing the terms of your loan — either with a lower interest rate or a longer repayment term (or a combination of the two). This strategy might be difficult if your current DTI is high. But as you work to lower it and your credit score goes up, see if you can refinance things like your auto loan to reduce your car payment.
If you’re a homeowner, refinancing your home loan can do wonders for your mortgage DTI ratio, especially if you have an FHA loan. Loans from the Federal Housing Administration (FHA) are popular for first-time buyers because they’re easier to qualify for than a conventional loan. But they also come with mandatory mortgage insurance premiums (MIP), which add to your monthly mortgage payment.
By refinancing to a conventional loan once your credit improves and you’ve built enough equity (usually 20% of your home’s value), you can eliminate these premiums entirely. This switch can lower your monthly mortgage payment, freeing up money for other debts and reducing your overall DTI. If market conditions are right, a conventional loan may also offer better interest rates, bringing your monthly debt obligations down even further.
Frequently asked questions
What expenses are included in DTIs?
Borrowers’ debt-to-income ratios (DTIs) look at all recurring debts to evaluate financial health, including:
Loan payments. Auto loans, student loans, and personal loans.
Credit card payments. The minimum monthly payment required on your cards.
Other obligations. Alimony, child support, and any other court-ordered payments.
What does gross monthly income mean?
Gross monthly income is the total amount of money you earn in a month before taxes and before deductions like Social Security, health insurance, or retirement contributions are taken out. It includes:
Salary or wages. Your pre-tax, pre-deduction earnings from a job.
Other income sources. Bonuses, rental income, freelance work, alimony, or any other consistent income.
Your gross monthly income factors into financial metrics like your debt-to-income ratio (DTI), which helps lenders evaluate your ability to manage debt and qualify for loans.
What are front-end and back-end DTIs?
Front-end and back-end debt-to-income ratios (DTIs) are two ways lenders measure your financial health.
Front-end DTI reflects the percentage of your gross income that you spend on housing costs like rent, mortgage payments, property taxes, homeowners insurance, and HOA fees. Back-end DTI includes all your other monthly debt obligations, like credit card or car payments, student loans, and alimony or child support.
Lenders typically prioritize back-end DTI when evaluating your overall financial stability, but both ratios play a role in determining loan eligibility.
Balance your debt and income better with EarnIn
Getting your DTI ratio on track goes far beyond monthly payments — it shapes your financial future. And EarnIn can help.
Our
Cash Out tool lets you access your pay as you work — up to $150 a day with a max of $750 between paydays
— to keep unexpected expenses from throwing off your budgeting plans. You can also use our free
Credit Monitoring tool to track your credit score
as you lower your debt and help improve your DTI.
Download EarnIn today to help make financial security more accessible.
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Calculated on the VantageScore® 3.0 model. Your VantageScore 3.0 from Experian® indicates your credit risk level and is not used by all lenders, so don’t be surprised if your lender uses a score that’s different from your VantageScore 3.0.
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