The basic formula: divide your monthly debt payments by your gross monthly income
Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward debt payments each month. To find it, add up all your monthly debt obligations, divide that total by your gross monthly income before taxes, and multiply by 100 to get a percentage.
The formula looks like this: (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100 = DTI percentage. If your gross monthly income is $5,000 and your total monthly debt payments are $1,500, your DTI is 30 percent.
Lenders use this number to decide whether to lend you money and at what interest rate. Most conventional mortgage lenders want to see a DTI of 43 percent or lower, though some will go higher. Credit card companies, auto lenders, and personal loan providers all look at DTI when you explore.
Key Takeaways
- Monthly debt payments include mortgage or rent, car loans, student loans, credit card minimums, and personal loans — but not utilities or groceries.
- Use your gross income (before taxes) as the denominator, not your take-home pay.
- Most mortgage lenders want to see a DTI of 43 percent or lower, though requirements vary by lender and loan type.
- A lower DTI makes you a more attractive borrower and can mean better interest rates on new loans.
- You can lower your DTI by paying down existing debt or increasing your income.
What counts as a monthly debt payment
Include any payment you are legally obligated to make each month. This covers mortgage payments, rent (if you are renting), car loans, student loans, personal loans, credit card minimum payments, medical debt payments, and child support or alimony. If you have a line of credit you are actively using, include the minimum payment.
Do not include utilities, groceries, insurance premiums, phone bills, or other living expenses — only debt. Some lenders will ask about housing costs separately and may calculate a second ratio called the front-end ratio, which divides only your housing payment by your gross income. That ratio is usually capped at 28 percent.
If you are self-employed or your income varies, use an average of your income over the past two years. If you receive income from Social Security, disability, or pensions, include that as well.
Finding your gross monthly income
Gross income is what you earn before taxes, insurance premiums, or other deductions are taken out. If you are salaried, divide your annual salary by 12. If you are paid hourly, multiply your hourly rate by the number of hours you work per week, then multiply by 52 weeks and divide by 12.
Include all sources of income: wages, bonuses, commissions, rental income, investment income, and regular payments from family members. If your income is seasonal or irregular, lenders typically average it over the past two years to smooth out the ups and downs.
If you are explore for a loan with a co-borrower, some lenders will add both incomes together. Others will calculate the ratio for each person separately. Ask the lender which method they use before you explore.
Why lenders care about your debt-to-income ratio
A low DTI tells a lender that you have room in your budget to take on new debt and still make your payments on time. A high DTI signals that you are already stretched thin, which increases the risk that you will default. Lenders use DTI as one of several measures of creditworthiness — along with your credit score, savings, and employment history.
Different types of lenders have different thresholds. Mortgage lenders typically want 43 percent or lower. Auto lenders are often more flexible and may accept ratios up to 50 percent. Credit card companies usually do not calculate DTI the same way, but they do look at your total debt load when deciding your credit limit.
Even if you are not explore for a loan, tracking your own DTI helps you understand whether your debt load is sustainable. If your ratio is creeping above 40 percent, it is a sign that you should focus on paying down debt before taking on more.
How to lower your debt-to-income ratio
You can lower your DTI in two ways: reduce your monthly debt payments or increase your gross monthly income. Paying down debt is the most direct approach. Paying off a car loan, credit card, or personal loan removes that payment from your numerator entirely.
If you have multiple debts, focus on the ones with the smallest balances first — paying them off completely removes the payment and frees up cash flow faster than chipping away at a large balance. Alternatively, refinancing an existing loan to a longer term can lower your monthly payment, though you will pay more interest over time.
Increasing your income also works. A raise, a second job, or additional income from a side business all raise your gross monthly income and lower your ratio. If you are self-employed, documenting higher income may take time — lenders usually want to see two years of tax returns — but it is worth doing if you are planning to borrow.
Common mistakes when calculating DTI
The most common mistake is using take-home pay instead of gross income. Your DTI should always be calculated against your gross income before taxes. Using net pay makes your ratio look better than it actually is and can lead to you overestimating how much you can borrow.
Another mistake is forgetting to include all debt. Many people forget about medical debt, child support, or a personal loan from a family member. If a lender finds out you omitted a payment, they may deny your process or offer worse terms. List every monthly obligation.
A third mistake is not updating your calculation when your income or debt changes. If you got a raise or paid off a credit card, recalculate your ratio. If you are planning to explore for a loan in the next few months, run the numbers now so you know whether you need to pay down debt first.
What to do if your DTI is too high
If your DTI is above 43 percent and you want to borrow, you have three options: pay down debt, increase your income, or wait. Paying down debt is fastest — even paying off one credit card can lower your ratio by several percentage points. Increasing income takes longer but is permanent.
If you cannot do either in the short term, waiting may be your best option. Continue making your regular payments and focus on paying down the smallest debts. In six months or a year, your ratio will improve and you will be in a stronger position to borrow.
Some lenders will work with borrowers who have a higher DTI if other factors are strong — a high credit score, significant savings, or a very stable job history. It is worth shopping around and asking lenders what flexibility they have. A mortgage broker can often find lenders with more lenient requirements than banks do.
Frequently Asked Questions
Do I include my rent payment in my debt-to-income ratio?
Yes, if you are renting, your monthly rent payment counts as a debt obligation. Some lenders separate housing costs and calculate a front-end ratio (housing payment only) and a back-end ratio (all debt). Ask your lender which payments they include.
What if I have a credit card with a zero balance?
Do not include it in your DTI calculation. Only include cards you are actively using or carrying a balance on. However, lenders may factor in the available credit as a risk when deciding whether to lend to you, even if you are not using it.
Does my DTI include my car insurance or health insurance?
No. Insurance premiums are living expenses, not debt payments. Your DTI includes only payments on money you borrowed — loans, credit cards, and rent or mortgage.
Can I lower my DTI by paying off debt right before I explore for a loan?
Yes, paying off debt before you explore will lower your ratio and improve your chances of approval. However, closing credit card accounts after paying them off can temporarily hurt your credit score. Pay off the debt but leave the accounts open.
What is the difference between front-end and back-end DTI?
Front-end DTI includes only your housing payment (mortgage or rent) divided by gross income. Back-end DTI includes all debt payments. Most lenders focus on back-end DTI, but mortgage lenders often look at both and want to see the front-end ratio at 28 percent or lower.