What Is a Good Debt-to-Income (DTI) Ratio? Here’s What Lenders Want to See

When you apply for a mortgage, car loan, or personal loan, lenders look at more than just your credit score. They want to know if you can comfortably afford the new monthly payments. That's where your debt-to-income (DTI) ratio comes in. It's one of the most important financial health metrics lenders use, and understanding it is key to securing the best possible rates.

What is a debt-to-income (DTI) ratio?

Your DTI ratio is a simple percentage that compares your total monthly debt payments to your gross monthly income (the money you earn before taxes and deductions are taken out). A high DTI signals that you are already allocating a large portion of your income to existing debts, which makes lending to you a higher risk. A low DTI, on the other hand, suggests you have a healthy balance of debt and income, making you a more attractive borrower.

How to calculate your DTI ratio

Follow these simple steps to find your DTI:

1. Add up your gross monthly income. This is your income before any taxes or other deductions are subtracted. If you are salaried, just divide your annual salary by 12.

2. Calculate your total monthly debt payments. Include the minimum monthly payment for any revolving credit like credit cards, as well as installment loans for your car, student loans, or personal loans. You should also include alimony, child support, and—if you’re buying a home—your estimated new monthly mortgage payment.

3. Divide your total monthly debt payments by your gross monthly income.

4. Multiply by 100. This gives you your DTI as a percentage.

Example Calculation:

• Gross monthly income: $6,000

• Monthly debt: $300 (car payment) + $200 (credit card minimum) + $1,500 (estimated new mortgage) = $2,000

• DTI Ratio: ($2,000 / $6,000) x 100 = 33.3%

What DTI ratio is considered "good"?

While lenders will consider other factors like your credit score, a lower DTI will always put you in a better position. Here’s a breakdown of what your DTI ratio typically means:

• Below 36%: The sweet spot. This is the ideal range. Borrowers in this category are seen as low-risk and are the most likely to be approved for loans with the best interest rates.

• 36% to 42%: Acceptable, but with caution. Lenders may still approve you for a loan, but your debt level may cause concern. You might need other strong compensating factors, like a significant down payment, to offset a DTI in this range.

• 43% or higher: Often a roadblock for mortgages. Many "Qualified Mortgages" have a maximum DTI of 43%. If your ratio is at or above this level, you may have limited borrowing options.

Front-end vs. back-end DTI: What's the difference?

You may also hear lenders talk about two different DTI ratios:

• Front-end DTI: This ratio only considers your housing expenses (mortgage principal and interest, property taxes, and insurance) compared to your gross income. Lenders often look for a front-end DTI below 28%.

• Back-end DTI: This is the more commonly discussed, all-inclusive DTI ratio that covers all your monthly debt obligations.

For most conventional mortgages, lenders will primarily focus on your back-end DTI.

How to lower your DTI ratio

If your DTI is higher than you'd like, you have two main options: increase your income or decrease your debt. Here are some actionable strategies:

• Pay down existing debt. Use the "debt snowball" or "debt avalanche" method to aggressively pay off your highest-interest or smallest balances first.

• Consolidate high-interest debt. A personal loan or balance transfer credit card can help you consolidate multiple high-interest credit card payments into a single, lower-interest payment, reducing your monthly debt obligations.

• Avoid taking on new debt. Hold off on applying for new credit cards or financing a new car while you are in the process of getting a mortgage or other major loan.

• Increase your income. Even a small side hustle can significantly boost your gross monthly income and improve your DTI.

DTI vs. Credit Score: Which matters more?

Your DTI and credit score are different, but related. Your DTI does not affect your credit score directly, as credit bureaus do not track your income. However, paying down debt to lower your DTI will also reduce your credit utilization ratio, which is a major factor in your credit score, improving it over time.

Ultimately, lenders consider both. A high DTI might be overlooked if you have an excellent credit score, but having a low DTI is a powerful tool to secure the best loan terms.