Debt-to-income ratio: how to calculate DTI

How it works

DTI uses payments rather than total outstanding balances. Lenders may apply different definitions and limits for different loan programs. A proposed housing payment can be part of the calculation. Ask how the lender treats variable income, student loans, and other obligations instead of assuming an online estimate matches its underwriting.

A worked example

With $6,000 gross monthly income, $1,800 proposed housing costs counted by the lender, $300 car payment, and $150 other monthly debt, DTI is $2,250 / $6,000 = 37.5%. Paying down a card balance helps only to the extent that the required payment used in the calculation changes. Extra voluntary payments are a separate budget question.

What to compare

Document stable income and the required payments on every debt. Compare the lender’s number with your own take-home cash-flow budget. Food, childcare, utilities, taxes withheld from pay, and retirement saving do not disappear merely because a particular DTI calculation excludes them. Both calculations should make sense before choosing a borrowing amount.

A common mistake to avoid

Do not apply one universal approval cutoff to every product. Nor should you treat a low ratio as proof that a loan is affordable for your household. A borrower with significant medical or family expenses can have a manageable DTI and still lack cash for a larger housing payment.

Does DTI use gross or net income?

It generally uses gross income before tax deductions. A personal spending budget should also evaluate actual take-home income.

Sources and further reading

• CFPB: Debt-to-income ratio
• CFPB: Decide how much you want to spend on a home

Connect this to inflation

Inflation changes the spending power of money over time. Read the related inflation explainer, or compare dollars across years using your own assumptions.