Debt-to-Income Ratios Explained. What is a Debt-to-Income Ratio?
What’s your debt-to-income ratio? And what’s it used for?
Your debt-to-income ratio – or DTI for short – is a number that compares how much you owe each month to how much you earn each month.
This number, usually shown as a percentage, helps reassure lenders you’ll be able to repay a loan and keep up with payments. So, yeah, it’s kind of a big deal.
So, how do you learn your DTI?
Start by listing all your recurring monthly debts and adding them together. Things like the minimum amount you pay on your credit card. Your mortgage, car, or school loan payment. And any expenses related to kids, like child support, sports equipment, clubs, and memberships.
Then add up the gross income you receive each month. Gross income is the total amount before taxes are taken out. This could include your salary, wages and cash from tips. Your monthly business income. And any money you get from Social Security or other sources.
Then, divide your monthly debt by your monthly income and multiply it by 100. There you have it – your personal debt-to-income ratio.
So, what does it all mean?
A high DTI means you’ll spend half or more of your income just paying off debt. Saving or dealing with unexpected expenses will be tougher to do.
A low DTI means you’ll probably have money left over after paying bills each month. In other words – the lower your DTI, the better.
Looking to better understand your debt-to-income ratio? Contact your local banker to learn more.
Your debt-to-income ratio – or DTI for short – is a number that compares how much you owe each month to how much you earn each month.
Why Does This Ratio Matter?
Lenders use your debt-to-income (DTI) ratio to determine your ability to repay a loan and keep up with payments. Lenders determine their own ratio requirements for lending.
What Is a Good DTI?1
< or = to 35% - good; 36% to 49% - opportunity to improve; > or = to 50% - bad
People with a good DTI likely have money left over after paying monthly bills.
People in the opportunity-to-improve range are getting by, but should consider ways to save for unplanned expenses.
People with a bad DTI have at least half of their income going toward debt and are unable to save or afford other unexpected costs
Calculate Your Debt-to-Income Ratio
Step 1: List all your recurring monthly debt, including mortgage, car payments, student loans and credit card payments.
Step 2: Add all your monthly debts together.
Step 3: Write down all your monthly income, including wages, tips, business income, Social Security and other sources – before taxes are taken out.
Step 4: Divide your monthly debt by your monthly gross income. Then multiply that number by 100 to get a percentage.
Interested in finding ways to reduce your debt-to-income ratio?
Ask your local banker or visit our Financial Wellness Center to learn more.
This information and recommendations contained herein is compiled from sources deemed reliable, but is not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent or is offering any tax, accounting or legal advice.