Your Debt-to-Income Ratio
DTI stands for “Debt-to-income,” and it is one of the key items a lender reviews when underwriting a loan request. DTI is also known as the debt ratio and is usually expressed as a percentage. It indicates to a lender how much of your total income is obligated to the debts on your credit report. In other words, your DTI tells a lender whether or not you can afford the loan.
Calculating Your 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%.