How to Calculate Your Debt-to-Income Ratio (And Why Lenders Care)

What Is Debt-to-Income Ratio (DTI)?

Your debt-to-income ratio compares how much you owe each month to how much you earn. It's expressed as a percentage and tells lenders at a glance whether you can actually afford to take on more debt responsibly.

Think of it this way: if you earn $5,000 a month and you're already sending $2,000 to debt payments, you're living on $3,000. A bank adding another $1,500 mortgage payment starts to look risky — because they can see the math even if you've been managing fine so far.

The DTI Formula

What Counts as "Debt" in This Formula?

This trips people up. Lenders typically include:

• Minimum monthly credit card payments (not your full balance)
• Auto loan payments
• Student loan payments
• Personal loan payments
• Child support or alimony
• Any existing mortgage payments
• The proposed new mortgage payment (for purchase applications)

What they do not include:

• Utilities (electricity, water, phone)
• Groceries
• Insurance premiums (usually)
• Subscriptions

Worked Example: Calculating Your DTI

Let's say you're applying for a mortgage. Your situation looks like this:

With gross monthly income of $6,200:

This is borderline. Some conventional lenders will approve up to 36%; others will go to 43%. If your specific lender caps at 36%, you're cutting it very close.

What DTI Do Lenders Want?

Note that lenders actually look at two DTI figures. The "front-end" ratio covers only housing costs (typically should be under 28%). The "back-end" ratio includes all debts — that's the 43% figure most people cite.

How to Lower Your DTI Before Applying

You have two levers: reduce debt payments or increase income. Here's the practical playbook:

Pay Down High Monthly-Payment Debts First

Counter-intuitive tip: when preparing for a mortgage application, pay off the debts with the highest payment relative to their balance, not necessarily the highest interest rate. Eliminating a $220 student loan payment drops your DTI faster than reducing your credit card balance by $200 would.

Don't Close Credit Card Accounts

Closing accounts after paying them off can hurt your credit utilization ratio, which indirectly affects your loan terms. Paid-off and open is the ideal state.

Consider Income Documentation

Freelancers and self-employed applicants often have income that lenders may not fully count. Make sure you're documenting all legitimate income streams — rental income, side business revenue with two years of tax returns — to maximize your qualifying income.

Delay Large Loans Until After Closing

Do not finance a car, furniture, or appliances in the months before you apply for a mortgage. Each new debt payment raises your DTI and could push you past a lender's threshold.

Calculate Your DTI Right Now

Use our debt payoff calculator to see exactly how your current debts affect your ratios — and model what happens when you pay one off. If you're planning to buy a home, our mortgage calculator shows you what your PITI payment will look like at different price points so you can see your exact DTI before you apply.