Your lender will look at two key pieces of information when you apply for a loan: your credit history and your debt-to-income ratio (DTI). Your debt-to-income helps lenders to determine if you can repay your loan. It can also help you to obtain a clearer view of your financial situation. A debt ratio of 35% or less is generally preferred by lenders, but this can vary.
Here are some steps to help you calculate your DTI:
1. Know the formula
Your debt-to-income ratio is your total monthly debt – divided by your gross income – which is then expressed as a percentage.
A. Total: All monthly debt payments
B. Gross monthly income = C. Debt-to-income ratio of X%
2. Add up your recurring monthly debts
This should include all regular monthly debts you are required to pay. For example:
- Rent or mortgage payment
- Minimum credit card payments
- Auto loan and student payments
- Car and/or life insurance
- Child support and/or alimony
Any other monthly debt obligations and your sources of monthly income wages/salary:
- Tips and/or bonuses
- Social security or pension
- Child support and alimony
3. Divide your total debt by your gross monthly income
You will arrive at your personal debt-to-income ratio. For example:
$6,000 (gross monthly income) ÷ $2,000 (monthly debt) = 33% debt-to-income ratio
You can use our affordability calculator to help you determine your DTI.
Contact us with any questions.