Understanding your debt-to-income ratio

Like understanding your credit score, getting to know your debt-to-income (DTI) ratio is an important part of managing your overall financial picture. More than 40% of Americans are looking for ways overcome debt, according to the 2024 Wells Fargo Money Study, and understanding your DTI ratio can help you make informed decisions about managing debt and applying for new credit.

Calculating your DTI ratio can help you assess your comfort level with your current debt and decide if taking on more credit is a wise choice. When you apply for credit, lenders will look at your DTI ratio to evaluate the risk of extending credit to you.

Common Questions About Debt-to-Income Ratios

Why is debt-to-income important?

Lenders use the DTI ratio to assess your ability to manage monthly payments and repay borrowed money. It’s a big factor in determining your creditworthiness.

What is the formula for calculating my debt-to-income ratio?

The formula involves dividing your total recurring monthly debt by your gross monthly income (income before taxes or other deductions).

What monthly payments are included in my debt-to-income ratio?

Payments typically included are:

• Mortgage or rent
• Real estate taxes
• Homeowners insurance
• Car payments
• Student loans
• Minimum credit card payments
• Time share payments
• Payments on personal loans
• Child support and alimony payments
• Co-Signed loan payments

What payments should not be included in debt-to-income ratio?

Exclude the following from your DTI ratio calculation:

• Utilities (water, garbage, electricity, gas)
• Car insurance
• Cable and cell phone bills
• Health insurance
• Groceries and entertainment expenses

What payment do I use for my credit card debts when calculating debt-to-income ratio?

Use only the minimum monthly payment required.

How does my debt-to-income ratio affect my ability to get a loan?

A low DTI ratio reflects a good balance between income and debt, making you a more attractive candidate for loans. Lenders consider your DTI ratio alongside your overall income, debt, and credit rating.

What is considered a good debt-to-income ratio?

While standards vary, most lenders prefer a DTI ratio below 35%-36%. Some mortgage lenders may allow up to 43%-45%, with loans insured by the Federal Housing Administration (FHA) allowing up to 50%. For more specific standards, you should consult your lender.

Take charge of your financial future

Managing your DTI ratio is a powerful step toward financial stability. Keeping your DTI ratio in check can help you to confidently navigate your financial journey and stay prepared for both planned and unexpected expenses. You can use our calculator to check your DTI ratio and start planning toward your financial future.