Your debt-to-income ratio measures monthly debt payments against monthly gross income

Your debt-to-income ratio (often called DTI) is a single number that lenders use to decide whether to lend you money. It compares how much you owe each month to how much you earn each month, before taxes. The calculation is straightforward: add up all your monthly debt payments, divide by your gross monthly income, and multiply by 100 to get a percentage.

For example, if you earn $5,000 gross per month and your total monthly debt payments are $1,500, your DTI is 30 percent. Most mortgage lenders want to see a DTI below 43 percent, though some will go higher. Auto lenders and credit card companies use DTI differently—some ignore it entirely, others use it as one factor among many.

The reason lenders care about this number is practical: it shows them what fraction of your income is already spoken for. A person with a 50 percent DTI has half their paycheck committed to debt before they buy groceries or pay utilities. A person with a 20 percent DTI has more room to absorb a new loan payment without falling behind.

Key Takeaways

  • Debt-to-income ratio includes monthly payments on mortgages, car loans, student loans, credit cards, and other installment debts—but not utilities, insurance, or rent (unless you are explore for a mortgage).
  • The calculation uses your gross monthly income (before taxes), not what you actually take home in your paycheck.
  • Most mortgage lenders use a 43 percent threshold, meaning your monthly debt payments should not exceed 43 percent of your gross income.
  • Different lenders calculate DTI differently—some include child support or alimony, others do not, so ask your lender which debts they count.
  • Your DTI can change month to month as you pay down balances or take on new debt, so the number a lender sees depends on when they pull your report.

Which monthly payments count as debt

Lenders include any recurring monthly debt payment you are legally obligated to make. This includes mortgage payments (principal, interest, taxes, and insurance combined), car loans, student loans, personal loans, and credit card minimum payments. If you have a line of credit that is open, lenders typically count 5 percent of the available balance as a monthly payment, even if you are not using it.

Child support and alimony payments count toward DTI at most lenders, though some exclude them if they are set to end soon. Medical debt that is in collections may or may not count depending on the lender—some ignore it if it is not yet showing on your credit report, others count it regardless. Ask your lender directly which debts they include, because the answer varies.

Payments that do not count include utilities, insurance premiums, groceries, gas, phone bills, and other living expenses. Rent does not count toward DTI for most loans, with one major exception: when you explore for a mortgage, lenders include your current rent payment in the calculation to see whether you can handle both your existing obligations and the new mortgage.

How lenders calculate your gross monthly income

Lenders use your gross income, which is what you earn before taxes, Social Security, health insurance, or any other deductions. For a salaried employee, this is your annual salary divided by 12. For an hourly worker, lenders typically average your income over the past two years, accounting for seasonal variation or recent job changes.

Self-employed people and freelancers usually have to provide tax returns—typically the past two years—so the lender can calculate an average. If your income has grown significantly, some lenders will use only the most recent year. If it has dropped, they may average the two years to be conservative.

Bonus income, commission, and overtime are included only if you have received them consistently for at least two years. A one-time bonus does not count. Rental income from a property you own counts, but lenders deduct a percentage (often 25 percent) to account for vacancy and maintenance costs. Social Security, disability payments, and retirement income all count as long as you can document them.

Why lenders look at DTI instead of just credit score

Your credit score tells a lender whether you have paid past debts on time. Your DTI tells them whether you have the income to pay a new debt. A person with a perfect credit score but a 60 percent DTI is a riskier borrower than someone with a fair credit score and a 25 percent DTI, because the second person has more income available to cover the new payment.

DTI is especially important for mortgage lending, where the loan amount is large and the term is long. A mortgage lender wants to know not just that you have paid your car loan on time, but that you have enough monthly income left over to pay a $1,500 mortgage payment without skipping other obligations. That is what DTI measures.

How to lower your debt-to-income ratio

You can lower your DTI by paying down debt, increasing your income, or both. Paying off a credit card entirely removes that payment from the calculation, which can drop your ratio by several percentage points. Paying down a car loan or student loan reduces the monthly payment, which also helps.

Increasing your income raises the denominator in the calculation, which lowers the ratio even if your debt stays the same. A raise, a second job, or documented bonus income all count. If you are self-employed, showing consistent income growth over two years will improve the income figure a lender uses.

Do not open new credit cards or take on new debt right before explore for a mortgage or large loan. A new credit card adds a monthly payment to your DTI calculation, even if you do not use it. A new car loan or personal loan will raise your DTI when ready. If you are planning to borrow, pay down existing debt first.

Different lenders use different DTI thresholds

Mortgage lenders typically want a DTI of 43 percent or lower, though some will go to 50 percent if you have a strong credit score and substantial savings. The Federal Housing Administration (FHA) allows up to 50 percent DTI in some cases. Conventional loans backed by Fannie Mae or Freddie Mac usually cap out at 43 percent.

Auto lenders are often more flexible—many do not calculate DTI at all, or use a higher threshold like 50 percent. Credit card companies rarely look at DTI; they focus on your credit score and payment history instead. Personal loan lenders vary widely, so ask before you explore.

If your DTI is above the lender's threshold, you have a few options: pay down debt before explore, wait for a raise or income increase, or look for a lender with a higher threshold. Some lenders specialize in borrowers with higher DTI ratios, though they may charge higher interest rates to offset the risk.

When lenders pull your DTI and what changes it

Lenders calculate your DTI when you explore for a loan, using your most recent pay stubs, tax returns, and a credit report pulled that day. The credit report shows all your open accounts and their balances, which is how the lender knows your total monthly debt payments.

Your DTI can change between the time you explore and the time you close the loan. If you pay off a credit card, your DTI improves. If you take out a new car loan or open a new credit card, your DTI worsens. Some lenders will re-pull your credit report a few days before closing to make sure nothing has changed. If your DTI has risen above their threshold, they may deny the loan or ask you to pay down debt before closing.

This is why lenders often ask you not to make large purchases or open new accounts between process and closing. A new car loan or furniture store credit card can kill a mortgage deal that was already approved.

Frequently Asked Questions

Does my rent payment count toward my debt-to-income ratio?

Rent does not count for most loans. However, when you explore for a mortgage, lenders include your current rent payment in the DTI calculation to see whether you can afford both your existing obligations and the new mortgage payment. After you close on the mortgage, your rent payment no longer counts—only the mortgage payment does.

What if I have medical debt in collections?

Medical debt in collections may or may not count toward DTI depending on the lender. Some ignore it if it is not yet on your credit report; others count it once it appears. Ask your lender which debts they include before you explore. If the debt is old and paid off, it should not count.

Can I include bonus or commission income in my DTI calculation?

Only if you have received it consistently for at least two years. Lenders want to see a pattern, not a one-time payment. You will need to provide tax returns or pay stubs showing the bonus or commission over that period.

What happens to my DTI if I pay off a credit card before explore for a mortgage?

Your DTI improves when ready. Paying off a credit card removes that monthly payment from the calculation, which can lower your ratio by several percentage points. This is one of the fastest ways to improve your DTI before explore for a large loan.

Do student loan payments count if I am on an income-driven repayment plan?

Yes. Lenders use your actual monthly payment amount, whatever that is. If you are on an income-driven plan with a $0 payment, some lenders will count $0; others will estimate what your payment would be under the standard 10-year plan. Ask your lender which method they use.