In addition to your credit score, your debt-to-income (DTI) ratio is an important part of your overall financial health. Calculating your DTI may help you determine how comfortable you are with your current debt, and also decide whether applying for credit is the right choice for you.
When you apply for credit, lenders evaluate your DTI to help determine the risk associated with you taking on another payment. Use the information below to calculate your own debt-to-income ratio and understand what it may mean to lenders.
Common Questions About Debt-to-Income Ratios
Why is debt-to-income important?
Lenders use the debt-to-income ratio as a way to measure your ability to manage the payments you make each month and repay the money you have borrowed.
What is the formula for calculating my debt-to-income ratio?
It is calculated by dividing your total recurring monthly debt by your gross monthly income(s) (monthly income(s) before taxes or other deductions).
What monthly payments are included in my debt-to-income ratio?
These are some examples of payments included in debt-to-income:
- Monthly mortgage payments (or rent)
- Monthly expense for real estate taxes
- Monthly expense for home owner’s insurance
- Monthly car payments
- Monthly student loan payments
- Minimum monthly credit card payments
- Monthly time share payments
- Monthly personal loan payments
- Monthly child support payment
- Monthly alimony payment
- Any Co-Signed Loan monthly payments
Check with your lender if you are not sure about the items considered when calculating your debt-to-income ratio.
What payments should not be included in debt-to-income ratio?
The following payments should not be included:
- Monthly utilities, like water, garbage, electricity or gas bills
- Car Insurance expenses
- Cable bills
- Cell phone bills
- Health Insurance costs
- Groceries/food or entertainment expenses
Check with your lender if you are not sure about the items considered when calculating your debt-to-income ratio.
What payment do I use for my credit card debts, the minimum payment required or what I actually pay monthly?
Enter only the minimum monthly payment required each month.
What sources of income are considered?
Lenders consider the following sources of income:
- Wages
- Salaries
- Tips and bonuses
- Pension
- Social Security
- Child support and alimony
- Any other additional income
How does my debt-to-income ratio affect my ability to get a loan?
Lenders calculate your DTI to determine the risk associated with you taking on an additional payment. A low debt-to-income ratio reflects a good balance between your income and debt.
What is considered a good debt-to-income ratio?
Lenders consider different ratios, depending on the size, purpose, and type of loan. Your particular ratio in addition to your overall monthly income and debt, and credit rating are weighed when you apply for a new credit account. Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI. For more on Wells Fargo’s debt-to-income standards, learn what your debt-to-income ratio means.
Use our calculator to check your debt-to-income ratio
Get Started
This calculator is for educational purposes only and is not a denial or approval of credit.
QSR-0823-00271
LRC-0823
FAQs
Your particular ratio in addition to your overall monthly income and debt, and credit rating are weighed when you apply for a new credit account. Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.
What is the most common debt-to-income ratio? ›
If your debt-to-income ratio is higher than the widely accepted standard of 43%, your financial life can be affected in multiple ways—none of them positive: Less flexibility in your budget. If a significant portion of your income is going towards paying off debt, you have less left over to save, invest or spend.
What is not included in the debt-to-income ratio? ›
Many of your monthly bills aren't included in your debt-to-income ratio because they're not debts. These typically include common household expenses such as: Utilities (garbage, electricity, cell phone/landline, gas, water) Cable and internet.
What helps debt-to-income ratio? ›
The other way to improve your debt-to-income ratio is to lower your debt levels: Stop taking on more debt. Don't apply for new credit, avoid running up your credit card balances, and delay any major purchases. Pay down existing debt.
What is a bad debt-to-income ratio? ›
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
What profession has the worst debt-to-income ratio? ›
Debt-to-income ratios for all selected health professions except medicine exceeded 100%. For physicians, debt-to-income ratios ranged from 89% to 95%. On average, physicians (-0.3 percentage point) and optometrists (-0.5 percentage point) had negative changes in their debt-to-income ratios from 2010 to 2016.
How does debt-to-income ratio affect credit score? ›
Your DTI ratio refers to the total amount of debt you carry each month compared to your total monthly income. Your DTI ratio doesn't directly impact your credit score, but it's one factor lenders may consider when deciding whether to approve you for an additional credit account.
Does a mortgage count in the debt-to-income ratio? ›
You may notice slight variations between different lenders' calculations of DTI, but generally, these amounts are considered debt: Monthly housing costs, including a mortgage, insurance, homeowners' association fees and property taxes. Rent payments. Home equity loans or lines of credit.
What bills are included in DTI ratio? ›
Expenses To Include In Your DTI Calculations
- Your rent or monthly mortgage payment.
- Any monthly homeowners association (HOA) fees.
- Property taxes.
- Homeowners insurance payments.
- Auto loan payments.
- Student loan payments.
- Child support or alimony payments.
- Credit card payments.
Use the steps below to calculate your own back end debt-to-income ratio. Add up your total monthly bills. Make sure to include monthly rent or mortgage payments, loan payments, credit card minimum due payments, any child support/alimony payments. Expenses such as utilities are not included.
Two Components of DTI: Front and Back-end Ratios
There are two parts to your DTI ratio: the front-end ratio and the back-end ratio. The front-end ratio, often referred to as the housing ratio, only takes into consideration your housing costs like: Mortgage/rent payments.
What is a good debt ratio? ›
Do I need to worry about my debt ratio? If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.
How do you explain debt ratio analysis? ›
Debt Ratio Analysis Definition
It indicates what proportion of a company's financing asset is from debt, making it a good way to check a company's long-term solvency. In general, a lower ratio is better. Value of 1 or less in debt ratios shows good financial health of a company.
Are hoa fees included in the debt-to-income ratio? ›
If you have a single family home outside of an HOA community, you'll have to take care of all the maintenance costs yourself. The good thing is, underwriters won't consider such costs when they underwrite your loan. But within an HOA, those dues will be counted in your debt-to-income ratio when you finance a home.
Is 12% a good debt-to-income ratio? ›
It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”
What is the DTI limit for a mortgage? ›
On conventional loans, the maximum back-end DTI is 50%. There are tighter restrictions for DTI on “manual underwrites,” including a 36% to 45% cap on back-end DTI depending on your credit score and the amount of cash you have for reserves. The CFPB shows the median DTI of conventional borrowers is 37%.
Do I include rent in my debt-to-income ratio? ›
Front-end DTI only focuses on housing-related expenses. It's calculated using your current monthly mortgage or rent payment, including property taxes, homeowners insurance and any applicable homeowners association dues.
What is the ideal debt to capital ratio for a bank? ›
Overall, however, a D/E ratio of 1.5 or lower is considered desirable, and a ratio higher than 2 is considered less favorable.
