What Is a Good Debt-to-Income Ratio?
Written by
Jacob Wade
Edited by
Melanie Grafil
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Your debt-to-income ratio (DTI) is the amount of your debt payments relative to your income. Lenders use this metric to determine whether to approve you for a loan. The lower your DTI, the better your chance of getting approved for a loan.
What Is Debt-to-Income Ratio?
Your debt-to-income ratio measures your minimum monthly debt payments divided by gross monthly income. Your gross monthly income is your income before taxes and deductions, not what you take home.
When calculating your minimum monthly debt payments, it may include payments such as:
- Mortgage payments or rent
- Credit card minimum payments
- Auto loan payments
- Student loan payments
- Child support/alimony
- Other recurring loan payments, e.g., personal loans
Some monthly payments are not considered part of your debts, including streaming services, cell phone bill, internet bill and utilities.
How To Calculate Your Debt-to-Income Ratio
It’s fairly simple to calculate your debt-to-income ratio. Here’s how:
- Add up your monthly debt payments: This should include minimum payments on your current rent or mortgage, credit card minimum payments, car loans, student loans and more.
- Calculate your gross monthly income: Review your paystubs and figure out what you actually make in total, before taxes and deductions.
- Divide debt by income: Divide your minimum debt payments by your total gross monthly income. This is your DTI.
- Convert to a percentage: Multiply the result by 100 to get your DTI as a percentage.
DTI Formula
(Total Monthly Debt Payments / Gross Monthly Income) x 100 = DTI %
If you make $5,000 per month, and your monthly debt payments are $500 per month, your DTI would be 10%: $500 / $5,000 = 0.10 x 100 = 10.
What Is a Good Debt-to-Income Ratio?
A debt-to-income ratio of 36% or less is generally considered “good.” It helps put you in a good position to qualify for most loans and lines of credit, as you are seen as “low risk” to lenders.
Here’s a guideline for how you are doing with your debt-to-income ratio:
| Debt-to-Income Ratio | Description |
|---|---|
| Excellent: Below 20% | Indicates strong financial health, likely to get the best loan terms |
| Good: 20% to 36% | Very favorable for lenders with high approval chances |
| Acceptable/manageable: 37% to 43% | Generally acceptable for many loans, especially qualified mortgages |
| High: 44% to 50% | May qualify for some loans, but might require compensating factors, such as a higher credit score, larger down payment or cash reserves |
| Very high: Above 50% | Challenging to get approved for new credit. Focus on reducing debt. |
What Is A Good DTI For Buying A House?
For housing purposes, a debt-to-income ratioless than 43% is a good target. It’s the highest ratio a borrower can have and still get approved for a qualified mortgage, according to the Consumer Financial Protection Bureau (CFPB). A qualified mortgage has specific stable features that make it more likely to afford the payments.
Exceptions to the 43% Rule
- Small lenders: Those with under $2 billion in assets who made no more than 500 mortgages in the prior year — are allowed to offer qualified mortgages.
- Large lenders: They can still approve loans that aren’t qualified mortgages, as long as they can reasonably assure you can repay the loan.
Front-End vs. Back-End DTI
Mortgage lenders also review your “front-end” and “back-end” DTI when determining your loan approval.
- Front-end DTI: This only calculates your DTI based on your housing payments. A ratio of 28% or less is considered good.
- Back-end DTI: This includes all debt payments. A ratio of 36% or less, or less than 43%, is considered good enough to qualify.
Why Your Debt-to-Income Ratio Matters
Your debt-to-income ratio is used to determine your eligibility for future loans and lines of credit, including buying a home.
When You Have a Low DTI
Having a low DTI shows lenders that you know how to manage your debts well, and that your debt obligations are a smaller portion of your income.
Beyond getting approved for a car loan, credit card or personal loan, a low DTI gives you more financial flexibility. You have more money for savings and investments every month, and will have more financial stability if you keep your DTI low.
High Credit Utilization Affects DTI
While your DTI doesn’t directly affect your credit score, having a high credit utilization is usually a symptom of a high DTI. So aiming to keep your DTI lower can also help protect your credit score.
How To Lower Your Debt-to-Income
Lowering your DTI is simply a matter of paying off existing debts, or increasing your income.
Find Ways To Increase Your Income
If you want to increase your income to help lower your debt-to-income ratio, you’ll need to pursue raises at work or apply for a promotion or at another company. You can also pick up side hustle work to boost your income.
Focus on Paying Down Debt
Reducing your debt load can directly impact your DTI. Paying off debts with high monthly payments, such as auto loans or credit cards, significantly reduces your DTI. You might also consider debt consolidation to potentially lower your debt interest payments and combine them into a single, lower monthly payment.
Truthfully? The best approach is to do both. Work on increasing your income while paying down your debts with the highest monthly payments. Or pick up a side hustle while getting a debt consolidation loan to lower your monthly payments.
Your Debt-to-Income Ratio Matters — Make It Work for You
Your DTI can have a big impact on getting a mortgage for a home or other future borrowing needs. Working to lower your DTI can help you qualify for credit and improve your financial wellbeing. And keeping a DTI of 36% or less will help lower your risk profile, so that lenders won’t turn you away for future loans.
It’s a good idea to calculate your debt-to-income ratio before making any major financial purchase. If it’s over 36%, find ways to pay off debts and increase your income. Getting a lower DTI can open many financial doors, and give you more financial peace.
FAQs on Debt-to-Income Ratio
Not sure what's considered a good debt to income ratio? See how it impacts your finances with these helpful answers.- Does my rent count towards DTI?
- Yes, your rent counts toward your debt-to-income ratio. But when you're looking to purchase a home, your lender will actually look at your future mortgage payment, plus taxes and insurance, to calculate your DTI for determining how much house you can afford.
- How often should I check my DTI?
- It's a good idea to check your DTI before you need to get a loan or apply for a credit card. If you plan on buying a home, work with a lender to calculate your DTI for determining what mortgage you can qualify for.
- Can a high credit score compensate for a high DTI?
- Having a high credit score isn't necessary, but it won't hurt either. A higher credit score can help you qualify for a loan and get the lowest rate, but most lenders want to see a debt-to-income ratio below 43% to qualify you for a home. You may buy a home through specific loan programs with a higher debt-to-income ratio, such as FHA or VA loans.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
