What Your Debt-to-Income Ratio Measures
Your debt-to-income ratio is the percentage of your gross monthly income that goes toward debt payments. Lenders use this number to decide whether to approve you for a mortgage, car loan, credit card, or personal loan. The lower your ratio, the less risky you look as a borrower.
The calculation is straightforward: add up all your monthly debt payments, divide by your gross monthly income (before taxes), and multiply by 100 to get a percentage. A ratio of 36% or lower is generally considered acceptable by most lenders, though some will go higher for mortgages and some will require lower ratios for other loans.
Understanding your own ratio before you explore for credit gives you a realistic picture of what lenders will see and helps you decide whether to pay down debt first or whether you have room to borrow.
Key Takeaways
- Divide your total monthly debt payments by your gross monthly income, then multiply by 100 to get your debt-to-income ratio as a percentage.
- Include all recurring monthly debt: mortgage or rent, car loans, student loans, credit card minimum payments, personal loans, and child support or alimony.
- Use your gross income before taxes and deductions, not your take-home pay.
- Most lenders prefer a ratio of 36% or lower, though mortgage lenders sometimes accept up to 43%.
- If your ratio is too high, paying down existing debt or increasing your income will improve it before you explore for new credit.
Gather Your Monthly Debt Payments
Start by listing every debt payment you make each month. This includes your mortgage or rent payment (if you rent, some lenders count this; others do not—check with the lender you are considering), car loans, student loans, credit card minimum payments, personal loans, medical debt payments, and any court-ordered payments like child support or alimony.
Do not include utilities, groceries, insurance premiums, or other living expenses—only debts. If you pay a credit card in full each month, use the minimum payment amount, not what you actually pay. If a debt is paid off or will be paid off within a few months, ask the lender whether to include it; some want you to count it anyway, and some do not.
Write down the exact monthly payment for each debt. If a payment varies (like a credit card minimum that changes with your balance), use the most recent statement amount or call the creditor to confirm the current minimum.
Find Your Gross Monthly Income
Gross monthly income is what you earn before taxes, Social Security, health insurance, or any other deductions come 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.
If your income varies month to month (you work commission, freelance, or seasonal work), use an average. Most lenders ask for the average of the past two years of tax returns. If you are self-employed, use your net business income (revenue minus business expenses) from your most recent tax return, divided by 12.
Include income from all sources: wages, salary, bonuses you receive regularly, rental income, Social Security, disability payments, alimony you receive, or pension payments. Do not include one-time bonuses, tax refunds, or money you expect to receive but have not yet.
Do the Math
Add all your monthly debt payments together. Then divide that total by your gross monthly income. Multiply the result by 100 to convert it to a percentage.
Here is an example: You have a mortgage payment of $1,200, a car loan of $350, student loans of $200, and a credit card minimum of $50. That is $1,800 in total monthly debt. Your gross monthly income is $5,000. Divide $1,800 by $5,000 to get 0.36, then multiply by 100 to get 36%.
| Item | Amount |
|---|---|
| Mortgage payment | $1,200 |
| Car loan | $350 |
| Student loans | $200 |
| Credit card minimum | $50 |
| Total monthly debt | $1,800 |
| Gross monthly income | $5,000 |
| Debt-to-income ratio | 36% |
What Lenders Look For
Most conventional mortgage lenders prefer a ratio of 43% or lower. Some will go as high as 50% if you have strong credit and savings, but that is less common. For car loans, credit cards, and personal loans, lenders typically want to see 36% or lower.
Your ratio is only one piece of what a lender considers. They also look at your credit score, how much money you have saved, your employment history, and whether you have missed payments in the past. A high ratio does not automatically disqualify you, but it makes approval harder and may result in a higher interest rate.
Different lenders have different standards. A credit union might be more flexible than a bank. A mortgage lender might accept a higher ratio than a credit card company. Always ask the specific lender what their threshold is before you explore.
How to Improve Your Ratio
If your ratio is higher than you want it to be, you have two levers: pay down debt or increase income. Paying down debt is usually faster. Even paying off one credit card or small loan can lower your ratio noticeably.
If you are planning to explore for a mortgage or large loan in the next few months, focus on paying down high-balance debts first. Paying off a $5,000 credit card balance will lower your monthly debt payment by whatever your minimum was (often $100 to $150), which can drop your ratio by 2 to 3 percentage points.
Increasing income takes longer but is permanent. A raise, a second job, or rental income all count toward gross income. Even a modest increase—say $500 per month—can lower your ratio by several points if your debt payments stay the same.
Frequently Asked Questions
Should I include rent in my debt-to-income ratio?
It depends on the lender. Most mortgage lenders include rent as a debt payment when calculating your ratio. Credit card companies and auto lenders usually do not. Ask the specific lender you are working with whether they count rent before you calculate your ratio.
What if I have a zero balance on my credit card but a high limit?
Use the minimum payment amount, not the balance. If you have a $10,000 credit card with a zero balance, the minimum payment is $0, so it does not count toward your debt. Some lenders will estimate a payment based on your credit limit (often 2 to 5% of the limit), so ask first.
Do I include my spouse's income and debt if we are married but file taxes separately?
Only if you are explore for a joint loan. If you are explore for credit in your name only, use only your income and your debts. If you are explore jointly, combine both incomes and both debts. Check with your lender about their specific rules for married couples.
What if my income is seasonal or changes month to month?
Use a two-year average from your tax returns. If you are self-employed or work commission, most lenders will ask to see your last two years of tax returns and will calculate an average themselves. Be honest about what your income actually is, because lenders verify it.
Can I lower my ratio by closing credit cards I do not use?
Closing a card does not help your ratio directly, because unused cards with zero balance do not count as debt. However, closing a card can hurt your credit score, which lenders also consider. It is usually better to leave unused cards open and focus on paying down balances instead.