Your debt-to-income ratio (DTI) is the number lenders trust more than almost anything else. The calculation takes 5 minutes and can save you months of wasted time on applications you will not be approved for.
Step 1: Add Up All Monthly Debt Payments
| Debt Type | Example | Include? |
|---|---|---|
| Minimum credit card payments | $85 | ✓ Yes |
| Car loan payment | $420 | ✓ Yes |
| Student loan payment | $280 | ✓ Yes |
| Mortgage/rent | $1,350 | ✓ Yes |
| Groceries / utilities | — | ✕ No |
| Insurance / subscriptions | — | ✕ No |
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- Salary: Annual salary ÷ 12 ($72,000/year = $6,000/month)
- Hourly: Rate × 40 hours × 52 weeks ÷ 12
- Self-employed: Average net income over last 2 years ÷ 12
Step 3: Divide and Multiply
Total monthly debt: $2,135 · Gross monthly income: $6,000 · $2,135 ÷ $6,000 = 0.356 · 0.356 × 100 = 35.6% DTI — Result: At the acceptable edge. Many lenders will still approve, but the best rates usually go to borrowers under 36%.
What to Include in Your Monthly Debts
- Rent or mortgage payment (use the new payment if you are applying for a mortgage)
- Car loan and lease payments
- Student loan payments (use the amount due each month, even if you are on a payment plan)
- Personal loan payments
- The minimum payment on every credit card, not the balance
- Child support or alimony you are required to pay
Leave out groceries, utilities, insurance premiums, phone bills, and subscriptions. They are real expenses, but they do not count in the lender's formula.
Use Gross Income, Not Take-Home Pay
Lenders divide by your income before taxes. This surprises many people, because the money you actually spend is the money after taxes. If you divide by your take-home pay by mistake, your ratio will look worse than the number a lender sees. Use the gross figure to predict the lender's answer, and use your take-home pay separately to check whether a payment feels comfortable in daily life.
How Much Room Do You Have for a New Payment?
You can turn the formula around to find the largest new monthly payment that keeps you under a target ratio. Multiply your gross monthly income by the target, then subtract the debts you already have.
Income $6,000 · Current debts $2,135 · Room at 36%: $6,000 × 0.36 − $2,135 = $25 · Room at 43%: $6,000 × 0.43 − $2,135 = $445
At a 36% target there is almost no room, while at 43% there is room for a payment of roughly $445. That gap is why paying off a single debt before you apply can change which loans are possible.
Before: $2,135 ÷ $6,000 = 35.6% · After: ($2,135 + $450) ÷ $6,000 = 43.1% · With a $350 payment instead: ($2,135 + $350) ÷ $6,000 = 41.4%
Common Mistakes When Calculating DTI
- Using the balance of a debt instead of its monthly payment
- Counting only the new loan and forgetting your current payments
- Forgetting a student loan that is deferred or in forbearance, since many lenders still count it
- Using take-home pay instead of gross income
- Using your best month of income instead of an average, especially if your income changes
What to Do With Your Number
Under about 36%, you are in good shape for most loans. Between 36% and 43%, many lenders will still work with you, but your rate may be higher. Above 43%, your options narrow, and lowering the ratio before you apply, by paying off a small debt or adding income, is usually worth the wait. You can run these numbers in seconds with the free calculator on CheckAfford.
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