TFCU Articles & Resources

What Does Debt to Income (DTI) Really Mean?

Debt to income, or DTI, is a ratio financial professionals use to make lending decisions. The ratio reflects how reliable you are to lend to and sheds light on your overall financial health. Discovering your DTI is easy.

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First, total your monthly bills

Take some time and total up the general, recurring bills you pay each month, like:

  • Monthly rent or housing payment
  • Monthly child support or other marital debt
  • Auto loans, student loans or other monthly loan payments
  • Credit Card minimum monthly payments

Take note: Debts such as groceries, gas, parking, utilities, day care, cable, taxes (if not included in your mortgage payment) are generally not included in your debt to income calculation; however, in planning an overall budget, these items should be considered in what you’re committed to pay.

Next, divide your total into your income

To get your ratio, divide the total of your monthly bills above into your pretax, gross monthly income. This is the ratio that reflects your debt to income.

What is considered a good DTI ratio? Remember, the calculation uses your gross income, not your net income or take-home pay. So, the lower your DTI ratio, the more flexibility you will have in your budget to save, give, make home repairs, travel, etc.

  • A debt to income ratio of 35% or less is considered good and debt should be manageable.
  • With a debt to income ratio of 36% to 45% there may be opportunity to improve your debt structure, consider a smaller mortgage to allow your debt to be more manageable.
  • Over 45% debt to income indicates you may need to make some changes. A higher ratio could indicate little availability for funds to address unforeseen expenses and may affect your approval for a mortgage.

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Topics: Debt & Debt Consolidation, Home Buying & Selling

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