Debt-to-Income Ratio (DTI)

What is DTI?

Debt-to-income (DTI) ratio compares your recurring monthly debt payments to your gross monthly income and is expressed as a percentage. Lenders use DTI to judge your ability to repay new credit: lower ratios are generally more favorable.

Why DTI matters

• Influences approval for mortgages, auto loans, personal loans and credit cards.
• Helps lenders evaluate how much of your income goes toward debt obligations.
• Can affect interest rates and loan terms.

How to calculate DTI

DTI = (Total monthly debt payments ÷ Gross monthly income) × 100

Example:
* Gross monthly income: $5,000
* Monthly debt payments: $1,000
DTI = ($1,000 ÷ $5,000) × 100 = 20%

What DTI includes

Debts typically counted:
* Housing: mortgage or rent, property taxes, homeowners/renters insurance, HOA/maintenance fees (if included in monthly obligation)
Revolving debt: credit card minimum payments, HELOC and other line-of-credit minimums
Installment loans: student loans, auto loans/leases, personal loans, RV/boat loans, co-signed loans, IRS installment agreements
* Other obligations: child support, alimony, timeshare/court-ordered payments

Income typically counted:
* W-2 wages and tips
Self-employment income (documented on tax returns)
Pensions, Social Security, recurring retirement income
Investment and rental income (documented)
Child support and alimony (if documented)
* Recurring lottery or other steady payments (if documented)

What DTI excludes

Common items not counted as debt:
* Utilities (electric, water, internet, phone)
Most insurance premiums (unless bundled into mortgage payments)
Groceries, entertainment, subscriptions
Medical bills not financed through loans
Retirement contributions, informal household expenses

Income typically not counted:
* One-time windfalls (inheritance, one-off lottery)
Unverifiable cash income or income from household members not on the application
Temporary income expected to end soon

Typical lender guidelines

• Lenders commonly prefer DTI of 35%–36%.
• Mortgage lenders may approve higher DTIs in certain cases — often up to 45%. FHA loans and some underwriting scenarios can allow DTIs closer to 50%.
• Agencies such as Freddie Mac and Fannie Mae generally use 36% as a standard cutoff but allow higher ratios (up to mid-40s, or 50% under specific programs) for borrowers who meet additional criteria.

Improving your credit score can sometimes offset a higher DTI by making approval or better terms more likely, though it does not lower the DTI itself.

How to lower your DTI

You can lower DTI by reducing debt (numerator) or increasing income (denominator):

Reduce debt
* Pay down balances: use the snowball method (smallest balance first) or avalanche method (highest interest first).
Refinance high-interest loans to lower payments where feasible.
Avoid taking on new debt while you’re improving DTI.

Increase income
* Seek a raise, higher-paying job, or additional part-time/freelance work.
* Monetize skills or start a side gig.

Other actions
* Review credit reports for errors—incorrect balances or obligations can inflate your DTI; dispute mistakes and have them corrected.
Cut discretionary spending and follow a budget to free cash for debt repayment.
Provide lenders with documentation for stable income (pay stubs, offer letters) if you’ve recently changed jobs; lenders may request extra proof for recent job changes.

Bottom line

DTI is a key metric lenders use to assess your repayment capacity. Know what counts toward DTI, calculate it accurately, and use practical strategies—paying down debt, increasing income, correcting credit-report errors, and reducing spending—to improve your ratio and your chances of loan approval.