A debt-to-income ratio (DTI) is one way lenders (including mortgage lenders) measure an individual's ability to manage monthly payment and repay debts. DTI is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage.
How to calculate DTI
DTI is calculated by dividing your total monthly debt payments by your monthly gross income (before taxes). Debts to include are housing payments (mortgage or rent), car payments, student loans, alimony, maintenance, child support, credit card minimum payments, and line-of-credit minimum payments. The calculation does not typically include utility bills, insurance payments, and day-to-day expenses like gas and groceries.
So for example, if your DTI is 40%, that means that 40% of your income is obligated to debts on your credit report such as housing, car payments, and other loans.
A healthy DTI for someone with monthly rent or mortgage payments does not exceed 45%.
Two Main Kind of DTI
- The first DTI, known as the front-end ratio, indicates the percentage of income that goes toward housing costs, which for renters is the rent amount and for homeowners is PITI (mortgage principal and interest, mortgage insurance premium [when applicable], hazard insurance premium, property taxes, and homeowners' association dues [when applicable]).
- The second DTI, known as the back-end ratio, indicates the percentage of income that goes toward paying all recurring debt payments, including those covered by the first DTI, and other debts such as credit card payments, car loan payments, student loan payments, child support payments, alimony payments, and legal judgments.
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