Do you ever feel like your entire paycheck goes straight to loans and other debts? There’s a logical reason for this — your debt-to-income ratio (also known as DTI) is too high.
If your DTI percentage is high, it can make your debt load seem unmanageable. It also impacts other personal finance goals such as going back to school, building credit, or buying your first home.
Find out how to calculate debt-to-income ratio — and how to improve it to get the best deals on loans.
What is debt-to-income ratio?
Your debt-to-income ratio is a simple calculation of how much of your income goes towards debt payments and other financial obligations, such as rent. The lower your debt-to-income ratio, the better your overall financial situation will be.
The exact formula for how to calculate debt-to-income ratio is comprised of dividing the total of all your monthly debt payments by your gross monthly income:
- DTI = total monthly debt payments / gross monthly income
How does DTI affect your finances?
Financial institutions view your debt-to-income ratio as a gauge of your overall financial fitness.
DTI is a measure of your risk as a borrower. The higher your DTI is, the more likely you are to default on a mortgage loan or other debt payment — at least, that’s how the bank sees it. This figure is simply a way for lenders to measure your ability to repay money you’ve borrowed.
Because of this, knowing how to calculate debt-to-income ratio and keeping track of it is extremely important. It could be the deciding factor when you’re trying to get approved for a mortgage or car loan.
One thing to note: A debt-to-income ratio does not have an affect on your credit score directly. While credit bureaus do keep track of your gross income, they don’t use it as part of their calculations.
However, the amount of credit card debt you have in comparison to your credit spending limits (also known as your credit utilization ratio) does have an impact on your credit score. While this is a different topic, it’s important to keep that in mind.
How to calculate debt-to-income ratio
Before further explaining what a good DTI should be, let’s talk about how to calculate your debt-to-income ratio.
Implementing the formula from above, start by adding up your monthly debt obligations. Don’t forget to include your mortgage, home equity loan payments, car loans, student loans, and credit card debt, in addition to any other loans you might have.
Next, add up your total monthly gross income. This includes income from your day job, freelancing, side hustle, weekend gigs, passive income, and any investments.
Once you have both of these figures, your personal debt-to-income ratio is determined by taking your total debt and dividing that by your gross monthly income.
For example, my husband and I have a debt-to-income ratio of 25 percent, which is made up of a pretty large rent payment and a business loan. Neither one of us has student loan debt or car loans, since we paid those off a few years ago. Here’s our personal DTI formula:
Total debt obligations: $2,070
Total gross monthly income: $8,000
Debt-to-income ratio = 2,070 / 8,000 = 25.87 percent
To make it easy, simply add all your information into this calculator:
What is a good debt-to-income ratio?
So what is a good debt-to-income ratio, exactly? It depends on the type of loan you’re applying for.
If you’re in the market for a house, for example, most lenders require a 43 percent or less debt-to-income ratio for mortgage loans to be approved. This number is pretty high, and if you were actually putting over 40 percent of your money towards housing every month, it would likely be very difficult to maintain.
A low debt-to-income ratio is better. This looks more appealing to financial institutions and helps bolster your credit rating. Plus it gives you more cash flow every month. A DTI that’s smaller than 36 percent is advisable, with no more than 28 percent of that going towards housing payments.
In general, paying around 25 percent of your gross income towards debt is much more manageable. So many experts will advise you to aim for 20 to 25 percent DTI when possible. This leaves more money in your pocket for other bills and financial goals. (Hello, retirement fund!)
The bottom line about debt-to-income ratio
Do whatever you can to lower your debt-to-income number as much as possible, and your finances will thank you.
This includes paying down your credit card balances, reducing your housing expenses, and refinancing your student loans when possible. In addition to reducing your debt load, work towards increasing your gross income, as both of these factors will help your DTI.
The lower your ratio, the better you’ll be able to weather any financial emergencies that come your way. It’s a smart move to calculate your personal debt-to-income ratio and take action on reducing that number.
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|Lender||Variable APR||Eligible Degrees|
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|1.89% – 5.90%2||Undergrad & Graduate|
|2.25% – 6.09%3||Undergrad & Graduate|
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|2.39% – 6.01%||Undergrad |
|1.99% – 5.41%5||Undergrad & Graduate|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.