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Debt to Income Ratio

A debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it’s the percentage of your gross monthly income (income before taxes) that goes towards payments for rent, mortgage, credit cards, and other regular bills To calculate your debt-to-income ratio:

Step 1:
A debt-to-income ratio is calculated by adding up all your monthly debt payments and dividing them by your gross monthly income.

Add up your regular monthly bills which can include:

  • Monthly rent or house payment (if living with a parent, lenders will assume $300)
  • Monthly alimony or child support payments
  • Student, auto, and other monthly loan payments
  • Credit card monthly payments (use the minimum payment)
  • A car insurance payment for the new car of $100
  • Other debts

Note: Expenses like groceries, utilities, gas, and taxes generally are not included.

Step 2:
Divide the total by the gross monthly income (income before taxes).
Step 3:
The result is the DTI ratio, which will be in the form of a percentage. The lower the DTI; the less risky you are to lenders.

Here's an example: If a borrower's debt totals $1,000 per month and their monthly gross income equals $3,000, their DTI is $1,000 ÷ $3,000, or 33 percent.

Borrowers with bad credit should note that subprime lenders will normally cap a borrower's debt to income ratio at a maximum of 40 to 50 percent, including the monthly car payment plus $100 per month allocated for full coverage car insurance.