Debt-to-income ratio: what it is and how to improve it

Your debt-to-income ratio (DTI) is one of the first things many lenders look at when you apply for a loan. It tells them how much of your monthly income is already committed to debt payments (and whether your budget has room for another one).

Why lenders care about your DTI

Your debt-to-income ratio tells lenders if you can comfortably afford another monthly debt payment right now, or if you’re already stretched too thin. It’s different from your credit score, which tells lenders how well you’ve handled debt in the past. Your DTI is all about your finances right now.

For example, say Sarah and Michelle both each earn $6,000 a month and have similarly good credit scores. 

• Sarah has a mortgage, car loan, student loans, and several credit card payments that consume nearly 50% of her monthly income. 
• Michelle has only a small car payment that takes up 10%. 

Even though their credit histories look similar, Michelle’s lower DTI signals to lenders that she’s less financially stretched and more likely to have room in her budget for another loan payment. Therefore, all other factors being equal, Michelle is more likely to qualify for a loan with better terms. Sarah could be denied completely, depending on the lender’s DTI requirements.

How to calculate your DTI ratio step by step

The easiest way to calculate your DTI is to use an online debt-to-income calculator. It will automatically do the math for you once you enter your monthly income and debt payments.

If you’d rather calculate it yourself, use these steps from the Consumer Financial Protection Bureau:

Step 1: Add up your required monthly debt payments.

You’ll want to add up any of these types of debt or recurring payments: 

• Mortgage payment or rent
• Minimum credit card payments
• Auto loans
• Student loans
• Personal loans
• Child support or alimony

Step 2: Divide that total by your gross monthly income.

The next number you’ll need (in addition to your total debt) is your gross monthly income. Gross income is what you earn before taxes and other deductions.

Once you have those two numbers, insert them into this formula: 

Debt-to-income ratio = Total monthly debt payments ÷ Gross monthly income × 100

Example of calculating your DTI ratio

Say you earn $6,000 per month before taxes and have the following monthly debt payments:

To calculate your DTI, you would now divide $2,400 by $6,000.

$2,400 ÷ $6,000 = 0.40

Multiply by 100, and your DTI is 40%.

What counts toward your DTI?

One of the biggest sources of confusion is knowing which monthly bills belong in the DTI calculation. This isn’t an exclusive list, but these types of bills commonly are and are not included.

Front-end vs. back-end DTI: Understanding the difference

When you hear people talking about DTI ratios in general, they’re most likely referring to back-end DTIs. Your back-end DTI includes all of your monthly debt payments. 

But when you’re applying for a mortgage, you may also hear lenders talk about a front-end DTI, which includes housing costs only (think mortgage or rent, property taxes, and insurance). 

What is a “good” debt-to-income ratio for different loans?

The maximum DTI you can generally have for a loan is 50%, according to Experian. But more specifically, a “good” DTI is below 43%, and the best DTI is below 36%. 

That said, there’s no single DTI that guarantees loan approval. Every lender sets its own requirements. 

Here’s a general guide: 

What is the 43% rule?

The Consumer Financial Protection Bureau identifies a 43% back-end debt-to-income ratio as an important benchmark for many qualified mortgages. Some lenders and loan programs may allow higher DTIs, but keeping yours below 43% may improve your mortgage options.

5 practical strategies to improve your DTI ratio

Here are five ways to level up your finances and lower your DTI ratio if it’s currently feeling too high: 

1. Focus on lowering your monthly debt payments

Many people focus on paying off the debt with the highest interest rate first, which is often the right move for saving money. 

But if your goal is lowering your DTI before applying for a loan, it can also be worth looking at which debts have the largest required monthly payments.

For example, paying off a $450 monthly car payment will usually lower your DTI more than paying down a credit card with a $35 minimum payment.

2. Hold off on taking on new debt

Applying for a new car loan, financing furniture, or opening another credit card can increase your monthly debt obligations and push your DTI higher.

If you’re planning to apply for a mortgage or personal loan soon, it may make sense to put major financed purchases on hold until after your loan closes.

3. Look for ways to increase your income

Because income is the denominator in the DTI formula, earning more can improve your ratio even if your debt stays the same. A raise, bonus, second job, freelance work, or other steady source of income can all lower your ratio.

4. Refinance or consolidate debt if it lowers your monthly payment

Refinancing a loan or consolidating multiple debts may reduce your required monthly payment, which can lower your DTI. Just know that extending your repayment term may lower your DTI but increase the total interest you pay over the life of the loan.

5. Check your DTI before you apply

Check your DTI as soon as you know you could be considering taking out a loan so you have time to pay down balances, avoid new debt, or adjust your borrowing plans if needed. 

Summary of improving your debt-to-income ratio

Your debt-to-income ratio is simply a measure of whether your current budget can support new debt. Although lenders all have different requirements, a lower DTI generally gives you more borrowing options and may improve your chances of qualifying for better loan terms.

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¹The Prosper^® Card and Prosper Platinum Card are unsecured credit cards issued by Coastal Community Bank, Member FDIC, pursuant to license by Mastercard^® International.