Think of it as a “Traffic Light” for Your Budget
Your DTI ratio is a simple percentage that tells a lender how much of your monthly income is already spoken for by debt payments.
It’s calculated like this:
Your Total Monthly Debt Payments ÷ Your Gross Monthly Income = DTI Ratio
The Simple Breakdown:
-
The “Debt” Part: This includes payments for things like:
-
Car loans
-
Student loans
-
Credit card minimum payments
-
And the new mortgage you’re applying for.
-
-
Why It Matters to Lenders:
-
A low DTI (like a green light) means you have plenty of room in your budget for a new mortgage payment. You’re a safe bet.
-
A high DTI (like a red light) means your budget is already stretched thin. Adding a large mortgage payment could be risky, and a lender might not approve you.
-
In a nutshell: It’s a quick check to see if you can comfortably afford your new house payment on top of all your other bills.
A common rule of thumb is to aim for a DTI of 43% or less.
Example
Your Monthly Income: $5,000
Your Monthly Debts:
-
Car Loan: $300
-
Student Loan: $200
-
Credit Card Payments: $100
-
New Mortgage Payment: $1,500
The Calculation:
Step 1: Add up ALL your monthly debts.
$300 (Car) + $200 (Student Loan) + $100 (Credit Cards) + $1,500 (Mortgage) = $2,100
Step 2: Divide your total debt by your income.
$2,100 ÷ $5,000 = 0.42
Your Debt-to-Income (DTI) Ratio is 42%.
What this means:
This is right at the common limit many lenders use. It tells them that 42% of your income is already committed to debt payments, leaving 58% for everything else like taxes, food, utilities, and savings.