Glossary Term
Debt-to-Income Ratio (DTI)
A personal finance measure that compares an individual's monthly debt payment to their monthly gross income.
Your Debt-to-Income Ratio (DTI) is a mathematical metric used by lenders (banks, mortgage brokers) to measure your ability to manage monthly payments and repay the money you plan to borrow.
It is arguably the single most important number on your financial profile when applying for a home loan, often carrying more weight than your raw credit score.
The Formula
To calculate your DTI, divide your total recurring monthly debt by your gross monthly income (your income before taxes and deductions):
DTI = (Total Monthly Debt Payments / Gross Monthly Income) × 100
- Monthly Debt Includes: Rent/mortgage payments, auto loans, student loans, minimum credit card payments, and personal loans.
- Monthly Debt Does NOT Include: Groceries, utilities, health insurance, or entertainment expenses.
The Golden Thresholds
- Under 36%: This is considered excellent. Lenders view you as a very low-risk borrower, and you will likely qualify for the best interest rates.
- 36% to 43%: This is the standard acceptable range. Most conventional mortgages require a DTI of 43% or lower.
- Above 43%: You are considered a high-risk borrower. You may struggle to get approved for new lines of credit, or you will be forced to accept significantly higher interest rates to offset the lender's risk.