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To be financially healthy, it’s important to be informed. One helpful personal finance concept that everyone should know about is the debt-to-income (DTI) ratio. Your DTI not only provides you with information about your financial standing, but it’s also an integral part of the borrowing process.

Read on to find out more about what the DTI is, why it’s important to your financial health, and how to calculate it.

Key Points

  • Your debt-to-income (DTI) ratio is a measure of how much of your monthly income goes toward paying your monthly debt. 
  • A DTI ratio is calculated by dividing your monthly debt by your monthly income, then multiplying by 100 to arrive at a percentage.
  • A DTI ratio no higher than 44% is generally recommended to increase the chances of loan qualification.

What Is A Debt-to-Income Ratio?

A debt-to-income ratio is a personal finance metric that compares your monthly debt payments to your gross monthly income. 

Lenders will often use this ratio to see how you can manage monthly debt payments. This means that if you have a low ratio, there is a better chance that lenders will trust you with their money.

You should know what your personal DTI ratio is because it can help give you a simple and clear look at how well you are managing and handling your debt every month. Sometimes, we don’t see just how much we are spending unless it is staring us right in the face. Seeing this ratio can be a wake-up call for people who have far too much debt compared to their income.

How Do You Calculate Your Debt-To-Income Ratio?

Now that you know what a debt-to-income ratio is, how do you go about calculating it? Thankfully, it is a fairly simple process and shouldn’t take you that long at all to figure out. 

A DTI ratio is calculated by dividing the debt payments you make each month by how much money you make each month before tax. The number is normally presented as a percentage.

For example, let’s say you make $4,000 a month and have $1,500 in monthly debt. In this scenario, your DTI would be 37.5%. 

Gross Income$4,000
Total Monthly Debts$1,500
Debt-to-income ratio37.5% ($1,500 ÷ $4,000 x 100)

What Is A Good Debt-To-Income Ratio?

As for what is considered a good DTI, that can be fairly subjective depending on wages and the type of debt you have, but there are a few general rules and guidelines that you can follow.

Debt-to-income ratios 45% and overIn general, anything over 45% and you have far too much debt for your income. 
Debt-to-income ratios between 40% – 44%Lenders may still approve you for loans with a DTI of 44%. However, in some cases, it may lead to higher interest rates or you may be approved for lower loan amounts.
Debt-to-income ratios between 32% – 39%Having a DTI ratio in the mid-to-low 30s is normally ideal. Generally, lenders require you to have no more than 39% of non-mortgage debt. 

Simply put, the lower the number, the better chance you will have at securing a mortgage, car loan, or any other type of loan you may be interested in.

How To Improve Your Debt-To-Income Ratio

There are 3 different ways to lower your debt-to-income ratio:

  • Eliminate or reduce the monthly recurring debt you have
  • Increase the income you make per month
  • A combination of the above

While this sounds easy, it’s not always simple to go out and make more money or reduce your debt. You need to make specific lifestyle changes and be conscious of these things going forward.

Ways To Lower Your Debt-To-Income Ratio

To make things a bit easier for you, consider the following tips to improve your DTI ratio:

Rent Your Space Or Items

If you own a home, one of the best ways you can lower your DTI ratio is to rent out a room or area of your home. This could potentially cover most, if not all, of your mortgage payments, which is one of the most common reasons for a high DTI ratio. You could also rent out items or things you own to get a bit more cash.

Pick Up A Side Gig Or Get A Higher Paying Job

Raising your income is one of the best ways to lower your DTI ratio. Of course, the first thing you could do is approach your boss about a raise. If they are unwilling, you can either look to get another job that is higher paying or simply find a second job to supplement your income.

Look At Making Some Money Online

If you can’t or don’t want to find a new job, or you can’t get a raise at your current one, you can look into making money online. Sure, most of the time it won’t be life-changing money you’re making, but it can help increase your income a little. 

With the internet and technology always improving, there are more and more opportunities to make money right from your home, with simply a computer or smartphone. You can do remote web design work, write, complete surveys, become a virtual assistant, and so much more.

Pay Off Your Debt More Quickly

Instead of making minimum payments or paying the same monthly payment despite being able to afford more, you should look to pay your debt down as quickly as you possibly can. While this isn’t always easy to do, especially if you have a low income, it can help reduce your DTI ratio.

Review Your Expenses

Most of us have many monthly expenses, whether they are Netflix, a music streaming service, cable, etc. While some of these are essential, some of them aren’t. If you hardly use a subscription or service, cut that expense and either put the extra money toward paying down debt or bumping up your savings.

Sell Your Car And Get A Cheaper One

Besides a mortgage payment, a car loan payment is one of the biggest contributors to a high DTI ratio. Instead of continuing to pay a car loan you might not be able to afford, you could look into selling your car and getting something cheaper. This would lower your car payment each month, which will in turn quickly and easily drop your debt-to-income ratio.

What’s The Difference Between A Debt-To-Income Ratio And Credit Utilization Ratio?

Debt-to-income and credit utilization ratios are similar, though they’re not the same.

Your credit utilization ratio is a specific measure of the debt you carry in your revolving credit accounts compared to your available limits. It’s calculated by dividing your credit debt by your credit limit.

For example, if you currently have an outstanding credit card balance of $1,500 and your card’s credit limit is $5,000, then your credit utilization ratio would be 30% ($1,500 ÷ $5,000 x 100). Your credit utilization ratio is one of the factors used to determine your credit score.

Familiarizing yourself with both ratios is important to understanding your overall credit health and how lenders may perceive you when you apply for loans.

Do Lenders Use Gross Or Net Income When Calculating DTI Ratios?

Your gross (or pre-tax) monthly income is used by lenders when calculating your DTI ratio. That means no taxes or any other additional deductions are included in the calculation.

What Are The Limitations Of A DTI Ratio?

While your debt-to-income ratio gives lenders a good idea of what your financial health is currently like, it doesn’t provide details about your debt. Your DTI ratio gives all debt types equal weight, whether it’s high- or low-interest debt. 

In other words, a DTI ratio doesn’t distinguish the types of debt you carry. That means your high-interest debt (like credit card debt) is lumped together with low-interest debt. So, your ability to manage additional loan payments may not necessarily be as strong as your DTI ratio suggests if you’re carrying many high-interest balances.

Final Thoughts

Knowing what your debt-to-income ratio is can be helpful when it comes to understanding how much debt you truly have. It’s also an important measure that lenders use to see how you can manage debt. While it might always not be easy to improve your debt-to-income ratio, it can be done with a little bit of hard work and dedication.

Debt-To-Income Ratio FAQs

What monthly payments are included in a debt-to-income ratio?

Some examples of payments included in DTI ratios are:
  • Mortgage or rent payments 
  • Property taxes
  • Property insurance
  • Car payments
  • Student loan payments
  • Credit card payments
  • Personal loan payments
  • Child care payments

What income sources are considered in a DTI calculation?

Lenders will consider many sources of income, such as the following:
  • Wages
  • Bonuses and tips 
  • Pension income
  • Disability benefits
  • Rental income
  • Investment income

Why is my debt-to-income ratio important?

Lenders will calculate your debt-to-income ratio to determine whether you’re able to comfortably manage additional loan payments. The higher your DTI ratio, the riskier you may be to a potential lender.

Will a high DTI ratio hurt my credit score?

Your DTI ratio won’t directly affect your credit score, but it could be a factor that lenders look at when determining whether to approve your loan application.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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