What is Debt-to-Income Ratio and How to Calculate it?

Table of Contents
To achieve your goals and manage your money effectively, you should understand the key metrics of personal finance. One of the vital metrics is the debt-to-income ratio or DTI. If you are planning to apply for a loan, buy a house, or assess your financial health, knowing your DTI will provide valuable insights to you.
Itās a simple and powerful indicator that will significantly impact your ability to secure credit. But most people donāt know about the term completely, so through this blog we can delve into what is debt-to-income ratio, how to calculate and why it is important for financial journey in detail.
What is Debt-to Income Ratio?
The debt-to-income ratio (DTI) is a personal finance measure that will compare your total monthly or annual debt payments to your monthly or annual income. It shows the answers as a percentage, and you can easily understand how much of your income is dedicated to covering your debts. And also, DTI is an essential component of the risk assessment process because it will provide a clear picture of how much your income is already tied up.
Lenders like banks and credit unions are using the DTI ratio as a critical tool to assess your creditworthiness and your capacity to take out a new debit. If you have a low DTI, it means you have a good balance between your income and your debt, so you donāt struggle with additional monthly payments. But if you have high DTI, make lenders hesitant to approve new loans because it signals financial strain.
How to Calculate Your Debt-to-Income Ratio?
The calculation of your debt-to-income ratio is a straightforward process, but it needs the correct information about your monthly debt payment and your gross monthly income. Here’s a step-by-step guide:Ā
Step 1: Calculate Your Total Gross Monthly IncomeĀ
Gross monthly income means the total amount of money that you earn in a month before taxes, reductions, or payroll contributions are taken out. This includes;
š CommissionsĀ
š BonusesĀ
š TipsĀ
š Child SupportĀ
š Social Security BenefitsĀ
š Disability IncomeĀ
š Any other regular income sourcesĀ
Step 2: Calculate Your Total Monthly DebtsĀ
Next you sum up all your monthly debt payment, that include the following;Ā
š Housing Payments (like rent payments, monthly mortgage payment, house owners’ association fees, etc.)Ā
š Loan Payments (like education loan, personal loan, any other installment loan payments, etc.)Ā
š Credit Card PaymentsĀ
š Other DebtsĀ
Important Note: If you are calculating your DTI, certain regular expenses are not included that include;Ā Ā
š GroceriesĀ
š UtilitiesĀ
š Bills (phone, internet, insurances)Ā
š TransportationĀ
š Taxes (income and sales tax)Ā
š Entertainment expensesĀ
š SavingsĀ
Step 3: Apply the Debt-to-Income Ratio FormulaĀ
Once you calculate your total gross monthly income and your total monthly debts, now you apply this formula;
Debt-to-Income Ratio (DTI) = (Total Monthly Debt Payments Ć· Gross Monthly Income) Ć 100
Example:
If your monthly debt is ā¹33,000 (including your rent, car payment, and credit card minimums) and your gross monthly income is ā¹1,00,000.
Calculate DTI through;
DTI = (ā¹33,000 Ć· ā¹1,00,000) Ć 100 DTI = 0.33 Ć 100 DTI = 33%
You can also use a debt-to-income ratio calculator online like Wells Fargo’s or Calculator.net. By using these calculators, you can easily get the findings but understand the manual process and ensure youāre including all relevant figures accurately.Ā Ā

Why is it Important to Know the Debt-to-Income Ratio?Ā
Knowing your debt-to-income ratio is very important because that impacts both your immediate financial standing and your long-term financial goals. Some of the major factors are detailed below;Ā
Lender Assessment for LoansĀ
DTI ratio is a primary metrics lenders use to determine your eligibility for loans, but the limit of DTI varies depending on loan products and lenders.
a) Below 36%: It is considered a good DTI. Lenders view this as a healthy balance, confirming that you can manage existing debts and are comfortable providing new loans to you.Ā Ā
b) 36% to 43%: This range is often acceptable particularly for mortgage lenders using a “back-end” ratio that includes housing costs. However, it might require a strong credit score.Ā Ā
c) Above 43%: It seen as a high DTI, some lenders might approve loans with a DTI above this, but it comes with higher interest rates or stricter terms.Ā Ā Ā
Financial Health CheckĀ
Your DTI provides a clear picture of your personal financial health. So, if you have a high DTI, it means too much of your income is going towards debt and less savings. Regular checking of your DTI will help to monitor your financial well-being and identify if you’re becoming overleveraged.
Informing Financial DecisionsĀ
Knowing your DTI will help to make informed decisions about taking on new debt. It can guide you on how much debt-to-income ratio is good for your personal situation.Ā Ā
Risk ManagementĀ
The high DTI leads to many unexpected financial challenges like job loss, medical emergencies, or other expenses. So, you should maintain a lower DTI to reduce this financial risk and build resilience against life’s uncertainties.
Conclusion
Donāt think that debt-to-income ratio is just a number; it is a critical barometer of your financial stability and your ability to manage debt effectively. A healthy DTI not only opens doors to better lending opportunities, but it also offers responsible financial management. Regularly monitoring and actively working to improve your DTI is the smart step that you are taking for your financial future.
Discover how Navia can simplify your investments, open your account today!Ā
Do You Find This Interesting?
Frequently Asked Questions
What is a good debt-to-income ratio?Ā Ā
A good debt-to-income (DTI) ratio is generally 36% or lower. Lenders often prefer a DTI below 30% to ensure you can manage repayments comfortably.Ā
What is the formula for DTI?Ā
You can calculate your DTI through this formula;Ā
Debt-to-Income Ratio (DTI) = (Total Monthly Debt Payments Ć· Gross Monthly Income) Ć 100Ā
How can I improve my debt-to-income ratio?Ā Ā
You can improve your DTI by either increasing your gross monthly income (e.g., taking a side job) or, more commonly, by reducing your total monthly debt payments.Ā
Is my DTI the only factor lenders consider?Ā Ā
No, DTI is one of several factors. Lenders also consider your credit score, credit history, down payment amount (for mortgages), assets, employment history, and savings.Ā
How does DTI differ from credit scores?Ā Ā
A credit score assesses your past payment behavior and credit history, and DTI measures your current capacity to take on and manage additional debt based on your income versus existing debt payments.Ā
DISCLAIMER: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Brokerage will not exceed the SEBI prescribed limit.
Ā