What Is the DebttoIncome (DTI) Ratio?
The debttoincome (DTI) ratio is a personal finance measure that compares an individual’s monthly debt payment to his or her monthly gross income. Your gross income is your pay before taxes and other deductions are taken out. The debttoincome ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments.
The DTI ratio is one of the metrics that lenders, including mortgage lenders, use to measure an individual’s ability to manage monthly payments and repay debts.
1:22
DebtToIncome Ratio (DTI)
The Formula for the DebttoIncome Ratio Is
How to Calculate the DebttoIncome (DTI) Ratio
 Sum up your monthly debt payments including credit cards, loans, and mortgage.
 Divide your total monthly debt payment amount by your monthly gross income.
 The result will yield a decimal, so multiply the result by 100 to achieve your DTI percentage.
What Does the DebttoIncome Ratio Tell You?
A low debttoincome (DTI) ratio demonstrates a good balance between debt and income. In other words, if your DTI ratio is 15%, that means that 15% of your monthly gross income goes to debt payments each month. Conversely, a high DTI ratio can signal that an individual has too much debt for the amount of income earned each month.
Typically, borrowers with low debttoincome ratios are likely to manage their monthly debt payments effectively. As a result, banks and financial credit providers want to see low DTI ratios before issuing credit to a potential borrower. The preference for low DTI ratios makes sense since lenders want to be sure a borrower isn't overextended meaning they have too many debt payments relative to their income.
As a general guideline, 43% is the highest DTI ratio a borrower can have and still get qualified for a mortgage. Ideally, lenders prefer a debttoincome ratio lower than 36%, with no more than 28% of that debt going towards servicing a mortgage or rent payment.
The maximum DTI ratio varies from lender to lender. However, the lower the debttoincome ratio, the better the chances that the borrower will be approved, or at least considered, for the credit application.
Key Takeaways
 The debttoincome (DTI) ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments.
 Generally, 43% is the highest DTI ratio a borrower can have and still get qualified for a mortgage, but lenders prefer a ratio lower than 36%, with no more than 28% of that debt going towards servicing a mortgage or rent payment.
 A low DTI ratio demonstrates a good balance between debt and income, and banks and other credit providers want to see low DTIs before issuing credit to a potential borrower.
Example of the DebttoIncome (DTI) Ratio
John is looking to get a loan and is trying to figure out his debttoincome ratio. John's monthly bills and income are as follows:
 mortgage: $1,000
 car loan: $500
 credit cards: $500
 gross income: $6,000
John's total monthly debt payment is $2,000 ($1,000 + $500 + $500). John's DTI ratio is .33 (or $2,000 ÷ $6,000). In other words, John has a 33% debttoincome ratio.
How to Lower a DebttoIncome Ratio
You can lower your debttoincome ratio by reducing your monthly recurring debt or increasing your gross monthly income.
Using the above example, if John has the same recurring monthly debt of $2,000 but his gross monthly income increases to $8,000, his DTI ratio calculation will change to $2,000 ÷ $8,000 for a debttoincome ratio of 0.25 or 25%.
Similarly, if John’s income stays the same at $6,000, but he is able to pay off his car loan, his monthly recurring debt payments would fall to $1,500 since the car payment was $500 per month. John's DTI ratio would be calculated as $1,500 ÷ $6,000 = 0.25 or 25%.
If John is able to both reduce his monthly debt payments to $1,500 and increase his gross monthly income to $8,000, his DTI ratio would be calculated as $1,500 ÷ $8,000, which equals 0.1875 or 18.75%.
The DTI ratio can also be used to measure the percentage of income that goes toward housing costs, which for renters is the monthly rent amount. Lenders look to see if a potential borrower can manage their current debt load while paying their rent on time, given their gross income.
Real World Example of the DebttoIncome (DTI) Ratio
Wells Fargo Corporation (WFC) is one of the largest lenders in the U.S. The bank provides banking and lending products that include mortgages and credit cards to consumers. Below is an outline of their guidelines of the debttoincome ratios that they consider creditworthy or needs improving.
 35% or less is generally viewed as favorable, and your debt is manageable. You likely have money remaining after paying monthly bills.
 36% to 49% means your DTI ratio is adequate, but you have room for improvement. Lenders might ask for other eligibility requirements.
 50% or higher DTI ratio means you have limited money to save or spend. As a result, you won't likely have money to handle an unforeseen event and will have limited borrowing options.
Difference between the DebttoIncome and Debtto Limit Ratios
Sometimes the debttoincome ratio is lumped in together with the debttolimit ratio. However, the two metrics have distinct differences.
The debttolimit ratio, which is also called the credit utilization ratio, is the percentage of a borrower’s total available credit that is currently being utilized.In other words, lenders want to determine if you're maxing out your credit cards. The DTI ratio calculates your monthly debt payments as compared to your income, whereby credit utilization measures your debt balances as compared to the amount of existing credit you've been approved for by credit card companies.
Limitations of the DebttoIncome (DTI) Ratio
Although important, the DTI ratio is only one financial ratio or metric used in making a credit decision. A borrower's credit history and credit score will also weigh heavily in a decision to extend credit to a borrower. A credit score is a numeric value of your ability to pay back debt. Several factors impact a score negatively or positively, and they include, late payments, delinquencies, number of open credit accounts, balances on credit cards relative to their credit limits or credit utilization.
The DTI ratio does not distinguish between different types of debt and the cost of servicing that debt. Credit cards carry higher interest rates than student loans, but they're lumped in together in the DTI ratio calculation. If you transferred your balances from your highinterest rate cards to a lowinterest credit card, your monthly payments would decrease. As a result, your total monthly debt payments and your DTI ratio would decrease, but your total debt outstanding would remain unchanged.
The debttoincome ratio is an important ratio to monitor when applying for credit, but it's only one metric used by lenders in making a credit decision.
I'm a financial expert with a deep understanding of personal finance metrics, and I can provide valuable insights into the concepts discussed in the article about the DebttoIncome (DTI) ratio.
The DebttoIncome (DTI) ratio is a crucial personal finance measure that assesses an individual's ability to manage monthly payments and repay debts. It compares the monthly debt payments to gross income, expressed as a percentage. Here are the key concepts covered in the article:

Definition of DTI Ratio:
 The DTI ratio is the percentage of gross monthly income allocated to paying monthly debt payments, including credit cards, loans, and mortgage.

Formula to Calculate DTI Ratio:
 Sum up monthly debt payments (credit cards, loans, mortgage).
 Divide the total monthly debt payment amount by monthly gross income.
 Multiply the result by 100 to obtain the DTI percentage.

Interpretation of DTI Ratio:
 A low DTI ratio indicates a balanced relationship between debt and income.
 Lenders prefer lower DTI ratios, as they suggest effective management of debt payments.
 The article mentions that 43% is the highest DTI ratio for mortgage qualification, with a preference for ratios lower than 36%.

Example Calculation:
 An example is provided with John's monthly bills and income to illustrate how to calculate the DTI ratio.

How to Lower DTI Ratio:
 Strategies to lower the DTI ratio include reducing monthly debt or increasing gross monthly income.
 Realworld examples demonstrate how changes in income or debt payments impact the DTI ratio.

DTI Ratio for Mortgage Approval:
 Lenders, like Wells Fargo, use specific DTI ratio ranges to assess creditworthiness.
 Different ranges are provided, indicating the level of manageability of debt based on the DTI ratio.

Difference from DebttoLimit Ratio:
 The article distinguishes between DTI ratio and debttolimit ratio (credit utilization ratio).
 While DTI assesses monthly debt payments compared to income, the debttolimit ratio evaluates the percentage of available credit being utilized.

Limitations of DTI Ratio:
 The DTI ratio is just one metric; lenders also consider credit history and credit score.
 It doesn't differentiate between types of debt or consider the cost of servicing different debts.
In summary, the DTI ratio is a crucial metric in assessing financial health, but lenders consider multiple factors when making credit decisions. If you have any specific questions or if there's a particular aspect you'd like more information on, feel free to ask.