Improve your DTI
If you’re looking reduce your monthly debt payments, tracking your spending can help.
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Your debt-to-income (DTI) ratio compares how much you owe with how much income you earn in a given month. Specifically, it’s the percentage of your gross monthly income (income before taxes) that goes toward payments for rent, mortgage, credit cards, or other debt.
Lenders look at your DTI ratio when they’re determining whether or not to lend money or extend credit, because it’s a good indicator of whether you’re able to take on new debt.
Calculate your own DTI ratio today to see where you stand.
Step 1: To calculate debt-to-income ratio, add up your monthly expenses, which may include:
Step 2: Then, divide the total by your gross monthly income, which is your income before taxes. Expenses like groceries, utilities, gas, and your taxes generally are not included.
Once you’ve calculated your DTI ratio, you’ll want to understand how lenders review it when they’re considering your application. Take a look at the guidelines Wells Fargo uses:
Looking good. Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you’ve paid your bills. Lenders generally view a lower DTI as favorable.
Your next step. Before taking on any new debt, estimate the monthly payments and recalculate your DTI so you can see how additional debt could change it.
Opportunity to improve. You’re managing your debt adequately, but you may want to consider lowering your DTI. This could put you in a better position to handle unforeseen expenses. If you’re looking to borrow, keep in mind that lenders may ask for additional eligibility criteria.
Your next step. Learn how to reduce your debt and optimize your DTI ratio.
Take action. With more than half your income going toward debt payments, you may not have much money left to save, spend, or handle unforeseen expenses. With this DTI ratio, lenders may limit your borrowing options.
Your next step. Find out how paying down your debt or increasing your income can change your ratio. Take steps to manage your existing debt.