How to determine debt to income ratio
Your debt to income ratio, or DTI, is a number that represents how much of your income is going towards monthly payments. This information can be helpful for understanding how much debt you have compared to what you earn and whether or not you’ll be able to afford a mortgage payment. It’s also important for lenders when they’re deciding whether or not to give you a loan.
Below are the steps for calculating your debt-to-income ratio:
What is your total monthly debt payment?
- Total monthly debt payment = total monthly debt payment
- Total monthly debt payment = ____
What is the total income you have coming in each month?
To determine your debt-to-income ratio, you must first determine your total monthly income. The best way to do this is by looking at all sources of income from all members of the household over the past three months. For example, if you have been working full-time for six months and made $25,000 during that period, your income would be $7500 per month ($25K/6).
This may seem straightforward enough, but there are a couple of situations where this step can get confusing:
- Married couples with separate finances
- Single people who maintain multiple bank accounts or credit cards
Divide total monthly debt payment by total monthly income.
To determine your debt to income ratio, divide the total monthly debt payment by the total monthly income. If you have a car loan for $300 and earn $2,000 per month, then your calculation would look like this:
- Divide 300 by 2000
- 0.15 or 15%
Multiply by 100 to convert to a percentage.
- To convert a decimal to a percentage, multiply by 100.
- To convert a percentage to a decimal, divide by 100.
- To convert a fraction to a percentage, move the decimal point two places right and add two zeroes on the end (0.5 becomes 50%, 0.75 becomes 75%). The same thing is done with decimals: move the decimal point two places left and add two zeroes on the end (2 becomes 200%).
- The reverse is true too: if you have 12% of something, multiply by 100 and put 2 zeroes on the end to get 120%. If you have 12 dollars in your pocket, divide by 100 and put 2 zeroes on the end (1 divided by 100 would be written as 1/100), or move the decimal point three places left if it’s already at “12” ($12 divided by 10 would be $1.20).
Debt to income ratio tells you what percent of your income is taken up by debt payments.
Debt to income ratio (DTI) is a ratio that tells you what percent of your income is taken up by debt payments. It’s typically used to determine if you can afford a mortgage or car loan, but it can also be applied to other types of debt.
A high DTI means that the sum of all your monthly payments combined represents too great a portion of your monthly income. If this is the case, then paying off the debt may require sacrifices in other parts of your budget and/or cause financial hardship for some time as you work towards becoming debt-free.
Debt to income ratio is an important indicator of your overall financial health. It can help you determine how much new debt you can take on, and how much you should work to pay down your existing debts. The lower your debt-to-income ratio, the better!