Your debt-to-income ratio (DTI) is an indicator of your overall financial health. The fewer repayment obligations you have, the lower your DTI, and the lower your DTI, the less risky you’ll appear to a lender. If your credit score and your DTI both look good, you’ll qualify for more generous loans and better mortgage deals. But what is a good debt-to-income ratio, and how can you improve your DTI?

In short, if your DTI is 36% or below, you’re generally in the clear. We’ll delve into that number a little more later on. Meanwhile, let’s begin with a thorough explanation of how lenders calculate DTI.

• How Do Lenders Calculate DTI?
• What Is a Good Debt To Income Ratio?
• How Can I Lower My DTI?
• Mortgages and DTI
• Medical Debt and DTI
• Does DTI Impact Credit?
• What is PTI?
• Recapping DTI

How Do Lenders Calculate DTI?

Nearly all credit applications include a spot for your income. Credit applications also ask about existing repayment obligations. Lenders use both of these figures to calculate DTI—and you can, too. Here’s how:

• Add up your total monthly income before tax.
• Add up all of your monthly debt payments and house-related expenses—loans, credit cards, mortgage payments, property tax and homeowner’s insurance, etc.
• Divide your total monthly debt by your total monthly pre-tax income.
• Convert to a percentage by moving the decimal point two places to the right.
• The number you get is your DTI.

Let’s see that in action:

• Your total monthly income is $2,900.
• Your total monthly debt payments and house-related expenses are $1,100.
• 1,100 divided by 2,900 is 0.38.
• Your have a debt-to-income ratio of 38%.

You can calculate your own DTI using a pencil, paper and a calculator, or you can use our handy online DTI calculator.

Front-End Versus Back-End DTI 

Credit industry pundits occasionally mention “front-end DTI” and “back-end DTI.” Here’s what those phrases mean:

• Front-end DTI calculations only use expenses directly related to housing, like mortgage, rent and property tax payments.
• Back-end DTI calculations use a range of regular payments to determine your monthly obligations, including credit card, auto loan, student loan, alimony and child support payments.

Most lenders focus on back-end DTI percentages because they paint a more realistic picture of applicants’ financial statuses.

What Is a Good Debt To Income Ratio?

Lenders use your DTI to gauge your ability to pay back a loan. The more monthly obligations you have, the higher your DTI will be. If you go over a certain threshold, lenders may be unwilling to approve applications for finance—even if you have great credit. Keep in mind, lenders all have their own DTI criteria, below are general, common guidelines. Let’s break that down in good, bad and ugly DTI:

• If your DTI is 35% or less, you’re doing well. Your repayments are manageable, and you may have room for another financial obligation.
• If you have a DTI ratio between 36% and 49%, you’re not doing too badly—but you have room to improve. You might find yourself in a tight spot in a financial emergency, for instance. If you do apply for credit, you may be asked for additional proof of your repayment ability.
• If your DTI is over 50%, you might find your existing expenses hard to handle. Lenders are much less likely to favor applicants with DTIs over this threshold. It might be time to reduce your debt-to-income ratio.

Is a 19% Debt To Income Ratio Good? 

Yes, a 19% debt-to-income ratio is very good—certainly far below the industry’s common maximum, which currently hovers between 43 and 49%. If your DTI is below 20, your payments are clearly manageable. You’re doing great—well done!

How Can I Lower My DTI?

Don’t panic if you have a high DTI. Instead, try to lower your debt-to-income ratio before you apply for a personal loan or a mortgage. Here are three things you can do to improve your DTI:

1. Pay off some of your debts. Pay your smallest debts first, and then move on to bigger debts. The more monthly payments you get rid of, the more of a dent you’ll make in your DTI.
2. Increase your income. This may be easier said than done, but if you can raise your income, your DTI will drop. Consider getting a part-time job or a freelance gig until your DTI improves.
3. Add a cosigner. If you’re buying a house, consider adding your partner to the application if they will help improve your ratio. The mortgage company will factor in both incomes and both sets of financial obligations to create a joint DTI.

If you think outside the box, you may be able to lower your DTI and improve your credit at the same time. Can you get a long-term family loan to consolidate some of your outstanding debts, for instance? Or could you sell something valuable and use the proceeds to eliminate one of your credit cards?

Mortgages and DTI

Mortgage lenders combine your DTI with a proprietary FICO score to determine your eligibility for a loan. Generally speaking, mortgage companies use a 28/36 DTI guideline. Here’s what that means:

• Your housing expenses, including things like your mortgage, homeowner’s insurance, property taxes, flood insurance, HOA fees and PMI won’t total more than 28% of your income.
• Your total monthly debt-to-income ratio—including all the expenses listed above, plus others—won’t total more than 36% of your income.

To be clear, most mortgage companies won’t cut you off entirely with a prospective DTI higher than 36%, but they might start side-eyeing you if your potential DTI rises over 45%. If you have a really low DTI—say, 18%—and a good credit score, you probably won’t find it hard to get pre-approved.

Medical Debt and DTI

Worried about medical debt and DTI? Thankfully, medical debts aren’t included in your DTI calculation—unless you don’t repay them on time and they go into collections. Once they’re in collections, they’ll factor into your DTI just like any other account on your credit report. To stop this from happening, try to work out an affordable repayment plan with your health care institution.

Does DTI Impact Credit?

Your debt-to-income ratio doesn’t affect your credit score at all. The formula used to calculate your credit score doesn’t include your income. Instead, financial institutions look at your credit score in tandem with your DTI before making lending decisions.

Curious about how bureaus calculate your credit score? Let’s answer that question with a quick breakdown:

• Your payment history makes up 35% of your FICO Late and missed payments reduce your score.
• The total amount you owe compared to your available credit, makes up 30% of your FICO Try to keep your credit utilization under 30% of your total available credit.
• The average length of your credit history makes up 15% of your FICO Don’t close older accounts unless you absolutely have to.
• Your credit mix makes up 10% of your FICO Aim for a good mix of revolving and installment loans.
• Any new credit makes up 10% of your FICO If you open several accounts in a short time, your score will temporarily drop.

What is PTI?

Auto loan providers use payment-to-income ratio (PTI), rather than DTI, to calculate an applicant’s creditworthiness. PTI is quite similar to DTI—in fact, your DTI includes your PTI. In a nutshell, PTI is the future percentage of your income taken up by your car payment and insurance. Most lenders prefer applicants with a PTI under 20%.

PTI is easy to calculate. Simply take your monthly income and multiply it by 0.20 to find your maximum PTI. Let’s use the same monthly income we used above—$2,900—as an example:

• 2,900 multiplied by 0.20 is 580
• Your monthly car payment and insurance payment can’t be more than $580

A similar calculation applies if your lender has a 15% PTI cap—in the example above, you’d be capped at $435. Interestingly, the same ratio applies whether your new car is your first, second or third vehicle.

DTI in a Nutshell

To recap, you can calculate your DTI by dividing your total monthly debt-related outgoings by your total monthly pre-tax income. If your DTI is under 35%, you’re doing well—but there might be room for improvement. The higher your DTI, the less likely you are to get credit—many mortgage companies, for instance, don’t lend to applicants with a DTI over 45%.

Medical debt doesn’t affect DTI, and your DTI won’t affect your credit score. PTI is similar to DTI—it’s basically debt-to-income ratio for a car loan—and it’s used by auto loan providers to calculate the maximum amount for your monthly car repayment and insurance. Finally, you can lower your DTI by paying off debt, increasing your income or adding a cosigner to your loan application.

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