Debt-to-income (DTI) ratio compares how much you earn to your total monthly debt payments. Understanding your DTI is crucial if you are thinking about buying a home or refinancing a mortgage.
Crunch the numbers with Money’s DTI ratio calculator and find out if you’re ready to apply for a home loan.
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What is Debt-to-Income Ratio?
The debt-to-income (DTI) ratio is a key financial metric that lets lenders know how much of a borrower’s monthly gross income goes into paying off their current debt. Gross monthly income refers to the sum total of your monthly earnings before taxes and deductions.
A low DTI indicates that the consumer is a low-risk borrower while a high one is taken to mean that the person is at a higher risk of defaulting on their debts.
How to Calculate Debt-to-Income Ratio
To calculate your debt-to-income ratio, first add up your monthly bills, such as rent or monthly mortgage payments, student loan payments, car payments, minimum credit card payments, and other regular payments. Then, divide the total by your gross monthly income (some calculators do request your gross annual income instead).
Your gross annual income includes wages, salaries, freelance income, overtime pay, commissions, tips and other allowances, etc.
What is included in your debt-to-income ratio?
Your DTI ratio should include all revolving and installment debts — car loans, personal loans, student loans, mortgage loans, credit card debt, and any other debt that shows up on a credit report. Certain financial obligations like child support and alimony should also be included.
Monthly expenses like rent, health insurance premiums, transportation costs, 401k or IRA contributions, and bills for utilities and services (electricity, water, gas, internet, and cable, etc.) are generally not included. However, if you have long-overdue bills for these types of accounts, they might eventually be passed on to a collection agency. The debt may be included in the calculation if that is the case.
There are two types of DTI ratios that lenders look at when considering a mortgage application: front-end and back-end.
What is your front-end ratio?
The front-end-DTI ratio, also called the housing ratio, only looks at how much of an applicant’s …….
