What is a Good Debt-to-Income Ratio?
September 4, 2020
Taken from Wells Fargo Website
In addition to your credit score, your debt-to-income (DTI) ratio is an important part of your overall financial health. Calculating your DTI may help you determine how comfortable you are with your current debt, and also decide whether applying for credit is the right choice for you.
When you apply for credit, lenders evaluate your DTI to help determine whether you can afford to take on another payment. Use the information below to calculate your own debt-to-income ratio and understand what it means to lenders.
How to calculate your debt-to-income ratio
Your 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 (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt. To calculate your debt-to-income ratio:
Add up your monthly bills which may include:
- Monthly rent or house payment
- Monthly alimony or child support payments
- Student, auto, and other monthly loan payments
- Credit card monthly payments (use the minimum payment)
- Other debts
Note: Expenses like groceries, utilities, gas, and your taxes generally are not included.
Divide the total by your gross monthly income, which is your income before taxes.
The result is your DTI, which will be in the form of a percentage. The lower the DTI; the less risky you are to lenders.
standards for Debt-to-Income (DTI) ratio
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 we use:
35% or less: 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.
36% to 49%: 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.
50% or more: Take Action - You may have limited funds to save or spend.
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.