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DTI Formula:
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The Debt-to-Income (DTI) ratio is a personal finance measure that compares an individual's monthly debt payments to their monthly gross income. It is expressed as a percentage and is used by lenders to assess a borrower's ability to manage monthly payments and repay debts.
The calculator uses the DTI formula:
Where:
Explanation: The ratio shows what percentage of your monthly income goes toward debt payments. A lower DTI indicates better financial health.
Details: DTI is crucial for loan approvals, mortgage applications, and overall financial planning. Lenders typically prefer DTI ratios below 36%, with no more than 28% of that debt going toward mortgage or rent payments.
Tips: Enter your total monthly debt payments and gross monthly income in dollars. Include all recurring debt obligations such as mortgage/rent, car payments, credit card minimums, student loans, and other monthly debt commitments.
Q1: What is a good DTI ratio?
A: Generally, a DTI below 36% is considered good, 36-43% is acceptable but may limit loan options, and above 43% may make it difficult to qualify for loans.
Q2: What debts should be included in DTI calculation?
A: Include all recurring monthly debts: mortgage/rent, auto loans, student loans, credit card minimum payments, personal loans, and any other fixed debt obligations.
Q3: Is DTI calculated using gross or net income?
A: Lenders typically use gross income (before taxes and deductions) for DTI calculations.
Q4: How can I improve my DTI ratio?
A: You can improve your DTI by increasing your income, paying down existing debts, avoiding new debt, or a combination of these strategies.
Q5: Why do lenders care about DTI?
A: DTI helps lenders assess your ability to manage monthly payments and repay borrowed money. Lower DTI indicates lower risk for the lender.