What is the Debt-to-Income Ratio (DTI)?

Debt-to-Income Ratio (DTI) is calculated by dividing one individuals or company's debt payments by his or her or its total income over a specified period, expressed as a percentage.

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How is Debt-to-Income Ratio Used?

The DTI ratio concerns person or company's ability to repay its debt. The creditor, such as a mortgage lender, takes this figure into consideration when lending money. A lower DTI ratio indicates a good financial balance; while a higher ratio suggests one might having difficulty servicing the debt. In the DTI ration, the debt payment is calculated by adding up all the payments you need to make in a given period (generally monthly). The calculation includes the proposed loan amount. The gross income is your total earnings in the period before paying taxes and other deductions.

Example of Debt to Income Ratio Calculation

Olivia pays $400 for her auto loan, $2,000 towards the mortgage and $200 to repay all other loans in a month. Her recurring monthly debt is $400 + $2,000 + $200 = $2800. If her gross monthly income is $8000, then her DTI would be $2800/$8000=0.35 or 35%.

Additional Considerations for Debt-To-income Ratio

It is important to maintain a lower DTI in order to secure a loan from any institution. For example, generally, an institution allows up to 43% DTI while approving a mortgage loan. However, a DTI of less than 36 is preferred. Further, the cost of servicing a mortgage should not constitute more than 28% of the total debt. While the DTI maximum is not the same for all lenders, there is always a better chance of getting a loan or line of credit approved with a lower DTI.

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