Debt-to-Income Ratio (DTI)
The percentage of your gross monthly income that goes toward paying your monthly debt payments.
Definition
Debt-to-Income Ratio (DTI) is a personal finance metric that compares your total monthly debt payments to your gross monthly income. It is expressed as a percentage.
Why It Matters
Your DTI is one of the most critical numbers lenders look at when you apply for a mortgage, auto loan, or personal loan. While your credit score tells a lender if you have a history of paying your bills on time, your DTI tells them if you have enough free cash flow to actually afford a new loan payment.
Lenders have strict DTI limits. Most mortgage lenders want your DTI to be below 36%, with no more than 28% of that debt going towards housing costs (like your mortgage, taxes, and insurance).
Practical Example
Let's calculate the DTI for someone who earns $6,000 a month before taxes (Gross Income):
- Car Payment: $400
- Student Loans: $300
- Minimum Credit Card Payments: $200
Total Monthly Debt: $900
Their current DTI is ($900 ÷ $6,000) = 15%.
Note: DTI does not include living expenses like groceries, utilities, or streaming subscriptions. It only includes fixed debt obligations.
If this person wants to buy a house with a $1,500 monthly mortgage payment, their new total debt would be $2,400. Their new DTI would be 40% ($2,400 ÷ $6,000), which may make it harder to get approved by a strict lender. You can see how much mortgage you can afford using our Mortgage Calculator.
Frequently Asked Questions
What is a good DTI ratio?
Generally, lenders look for a DTI of 36% or less, though some will approve mortgages up to 43% or even higher under specific circumstances.