How to Lower Your Debt-to-Income Ratio (DTI)

What Is Debt-to-Income Ratio?

DTI is the percentage of your gross monthly income that goes toward paying your debts. DTI tells lenders how much additional debt you can afford when you're applying for a loan or credit. Along with your credit score and credit report, DTI helps to paint a picture of your overall financial health and your ability to repay a loan without falling behind or defaulting.

Lenders review your DTI when you're applying for almost any type of new credit, including mortgages, home equity loans, auto loans and personal loans as well as new credit cards. A high DTI may signal to a lender that your debt load is unmanageable—or at risk of becoming unmanageable if you take on new credit. High DTI can affect your ability to get approved for a new loan or to get a favorable interest rate that makes your loan more affordable.

Learn more: Things Lenders Look at Besides Your Credit Score

How to Calculate Debt-to-Income Ratio

Before you apply for a new loan, you can calculate your own DTI to get a clearer picture of how a lender might view your application. Follow the steps below to get a quick estimate of your DTI.

1. Determine Your Income and Debt Payments

To calculate your DTI, you'll need to know your gross monthly income and monthly debt obligations and housing costs, such as your monthly mortgage payment. Here's a bit more detail to help you calculate these numbers:

• Gross income is your monthly earnings before taxes and other payroll deductions, plus all income from tips, bonuses, business income, pensions, Social Security, child support and alimony.
• Monthly debt payments include minimum credit card payments, plus monthly payments for auto loans, personal loans or student loans.
• Housing expenses include your rent or mortgage payment plus property taxes, homeowners or renters insurance, and homeowners association fees, if you pay them. Don't include utilities or other home-related bills.

2. Understand Front-End vs. Back-End DTI

There are two types of DTI lenders might consider when reviewing your credit or loan application:

• Front-end DTI includes your regular monthly housing expenses only.
• Back-end DTI includes your housing expenses plus your monthly debt payments.

3. Calculate Your DTI

Calculate your DTI by dividing your monthly expenses by your gross monthly income. Here's a quick example for both front-end DTI and back-end DTI:

Say your gross monthly income is $7,000 with a monthly housing expense of $2,250 and additional monthly debt of $600.

Your front-end DTI:

• $2,250 / $7,000 = 32%

Your back-end DTI:

• ($2,250 + $600) / $7,000 = $2,850
• $2,850 / $7,000 = 41%

Tip: Use a DTI calculator to save yourself some math. A calculator can also help you play out different scenarios quickly to see how paying off loans and credit, or increasing your income, might change your DTI.

What Is a Good Debt-to-Income Ratio?

Lenders typically set their own requirements on DTI, so there is no absolute standard for a good or bad ratio. From a lender's perspective, the lower your DTI, the better. Like a good credit score, a low DTI helps you secure the best interest rates and terms on a loan. That said, mortgage lenders generally require borrowers to have a back-end DTI of 43% or less to qualify for a mortgage, and many lenders prefer a DTI of 36% or less.

If you've been told your DTI is too high to qualify for a particular loan—and the tips below don't help reduce your ratio—you may want to shop around. Another lender with less stringent DTI requirements might be willing to work with you, especially if you have good credit. Alternatively, you may need to be flexible on interest rates and fees in order to find a loan that works. If your DTI is 50% or higher, your options may be limited.

How to Lower Your Debt-to-Income Ratio

You can lower your DTI by either reducing your monthly debt payments or increasing your income. Here are a few suggestions to get you started.

Pay Down Existing Debts

If you can, pay down or pay off your credit card balances. If you have low-balance loans you can pay off in full, you'll eliminate a monthly payment entirely. Disposing of debt helps you reduce your monthly debt expenses and quickly lower your DTI. Be careful not to deplete your savings in doing so, however, especially if you're planning to buy a house and need cash reserves.

Increase Your Income

First, make sure you're accounting for all of your existing income. You should include income from a second job or side business, child support or alimony, passive income and pensions when you report your income on a loan application.

Also look for ways to increase your income: Negotiate a raise, go for a promotion or land a higher-paying job, if possible. The downside is that it can take time to develop and document a higher income level you can use on a loan application. The upside: If your DTI needs a lift, it may be worth waiting on your loan application.

Learn more: What Counts as Income on a Credit Application?

Consider Consolidating Debt

You may be able to lower your monthly credit card payments with a debt consolidation loan. Converting to a lower-interest loan may also save you money on interest costs.

Avoid Taking on New Debt

If you're getting ready to apply for a new loan, try not to rack up additional credit card debt. Any added debt will only increase your monthly debt expenses (and raise your DTI).

Also consider this: If a high DTI might prevent you from getting the loan you want, ask yourself whether this is a good time to get a new loan. Using more than 43% of your income to service debt doesn't leave much for food, clothing, taxes or savings. If you can't reduce your DTI by raising your income or eliminating debt, you may want to avoid taking on new debt and use the time to rethink your finances.

Does Debt-to-Income Ratio Affect Credit Scores?

DTI doesn't affect your credit score. Income information doesn't appear anywhere on your credit report, which means credit reporting agencies can't use your credit report to calculate DTI. As a result, you can have an excellent credit score and a clean credit report and still have a high DTI. In fact, many people do.

Does Debt-to-Credit Affect Credit Scores?

Credit utilization, sometimes referred to as a debt-to-credit ratio, does factor into calculating your credit score. Credit utilization is the percentage of available credit you're using by carrying credit card balances. Higher credit utilization generally lowers your credit score; it's an indicator that you have a lot of debt relative to your debt capacity.

There's an indirect relationship between high credit utilization and high DTI. If you pay off credit cards to lower your credit utilization and raise your credit score, you will also reduce your monthly debt payments and improve your DTI. But high credit utilization doesn't necessarily mean a high DTI as long as you have sufficient income.

The Bottom Line

If you're planning to apply for a loan or credit in the near future, it pays to understand your DTI and do what you can to optimize it. It's also a great time to review your credit scores and report for free. This will help you better focus your actions so when you're ready to present your information to lenders, your profile is one they can happily approve.