Debt-To-Income

During the loan application process, you may discuss your debt-to-income ratio and how it impacts your ability to qualify for a loan. Often abbreviated as DTI, this number is a comparison of how much you earn per month to your debt per month. It’s represented as a percentage.

How Do I Calculate My DTI?

  1. Take the sum of all your monthly bills
  2. Divide by your gross monthly income
  3. Turn into a percentage

Example:

Monthly Bills:

$1,300 rent + $300 car payment + $100 student loan payment + $25 min. credit card payment = $1,725

Monthly Gross Income: $5,834

1,725 / 5,834 = 0.296

Percentage:
29.6% = DTI Ratio

How Does My DTI Impact My Creditworthiness?

A Lower DTI is generally regarded by lenders as more favorable. It makes you look like you’re a responsible spender and that you have enough cash after paying your bills to save or spend.

If your DTI is under 35%, you’re in a great place. Good job! Treat yourself to some extra dessert or something fun.

Between 35% and 49%, you’re doing well but with room to improve. At this rate, you may not be able to sustain your finance if something unexpected were to hit your finances, like needing a new hot water heater, or buying new tires for the car. It’s best to have the financial flexibility that allows you to be ready for anything.

A DTI at or above 50% raises some red flags for lenders. You don’t have a ton of flexibility after paying your bills, so money might feel like a source of stress for you. Lenders will probably limit your loan options accordingly.

Note: Having a high DTI ratio isn’t always a bad thing. If you are a recent grad and are aggressively paying towards your loans, for example, you are working towards building solid credit while also attacking a huge debt. This high DTI would only be temporary.

How Can I Lower My DTI?

Increase your monthly income

If you’re not due for a raise, then this one isn’t going to happen on its own. Our best suggestions are to look for alternative sources of income like finding a second job. There are ways to get creative, though. If you’re still holding on to your old college textbooks, they’re worth throwing on the internet for a few bucks. You can also make money online doing things like transcribing audio or taking surveys. These won’t turn your debt around, but they’re easier than finding another job.

Decrease your debts

Look at your monthly debt burdens. Are all of them necessary? (Do you need Netflix, Hulu, HBO Go, Peacock AND Disney+? No, you don’t. Use your cousin’s login.) If rent or a mortgage is a huge part of your debt, consider downsizing to a smaller apartment or refinancing for a lower interest rate. You
can’t live large if you aren’t making those big bucks (yet!).

Craving more? Get in contact with a professional today to get your specific questions answered. Our expert loan officers are available to guide you through the loan process.