What is your Debt-to-Income Ratio (DTI), and What Can You Do to Enhance It?

Suppose you are applying for a mortgage loan. In that case, the debt-to-income ratio (DTI) is one of the criteria, together with the credit score and income that lenders use to determine your mortgage eligibility.

If you’re planning to be eligible to get a mortgage or refinance, you’ll have to understand your debt-to-income ratio and then take the necessary steps to increase it.

We’re here for you by providing you with all the information you should be aware of concerning your DTI.

What is the Debt-to-Income Ratio?

DTI is the amount of your income that is used to pay the monthly installments of debt. This includes credit cards and student loans, car loans, child support, and mortgage payments. Your DTI, along with your score on credit, can help lenders assess the amount of credit risk you are.

Don’t fret if you’re concerned that your DTI could exceed the limit to be eligible for a loan. You can improve your ratio of debt to income. We’ll discuss this later.

How Do You Calculate Your Debt-To-Income Ratio

Your debt-to-income ratio measures the amount you owe each month with how much you earn each month. Calculating your debt-to-income ratio isn’t as hard as it appears. Utilize the following information to figure out the amount of your DTI is.

Step 1: Add Your Fixed Monthly Debt

The expenses could comprise:

  • Rent or mortgage payment for the month
  • Monthly credit card payment minimum
  • Auto, student, and other loan installments
  • Alimony or child support monthly payments
  • Other loans

Other payments like utility bills, groceries, gas, and other taxes are not typically considered in your DTI calculation. However, you should remember to consider them when you are planning your next homeownership budget. The cost of electricity, property taxes, and transportation can increase as you relocate.

Step 2: Divide by the Gross Revenue (Income before tax)

  • Income sources can include:
  • Earnings
  • Profits from business
  • Salaries
  • Tips and bonus
  • Pension
  • Social Security
  • Alimony and child support

Step 3. Convert Your Answer In A Percentage

The outcome is your ratio of income to debt.

Let’s look at an example. Consider that you have a monthly rent payment rate of $1,000, a car payment of $400, and a minimum credit card amount of $150. Also, let’s assume you earn monthly gross earnings of $5,000. The ratio of your debt to income is $1,550 multiplied by $5,500. This is .31 (or 31 percent). Creditors look at those who have lower DTI to have a lower risk of credit. Not only will you be more likely to be preapproved, but you’ll also have the chance to qualify for a lower interest rate. The less your DTI is, the lower the credit risk you pose to lenders.

What’s the reason your DTI is Important?

Your DTI is vital as it aids lenders in determining your mortgage eligibility and the probability that you’ll repay the loan.

Like your credit score and your credit score, your DTI can significantly impact your financial health as well as your chances of obtaining a mortgage or taking on additional debt. In the example above, If you applied for a credit card at a retail store and had a DTI of 60 percent, the credit card’s interest rate would be extremely high because your DTI is regarded as high. If your DTI were 40 percent, your interest rates would have been somewhere in the middle. Likewise, if you had a lower DTI of 15%, your rates would have been low.

A good debt-to-income ratio should be less than 35. It is possible to qualify for a loan with a DTI of 36 percent to 49%; however, if your DTI is 50 or more, it is best to increase it before applying for a mortgage.

Debt-To-Income Ratio For A Mortgage

In general, to be eligible for the best mortgage loans, You must be able to show a ratio of debt-to-income of no more than 43 percent. But, it’s crucial to keep in mind that mortgage eligibility is based on several variables, including the type of loan and type, down payment, expense ratio, and credit score.

If you’re considering getting a mortgage DTI can be one of many terms you’ll encounter. Be sure to know all the important terms of the mortgage process and be aware of the questions to inquire from your lender.

How To Increase Your Debt-to-Income Ratio?

If you’re looking to boost the quality of your DTI and increase your chances of receiving better rates of interest, then here are a few suggestions to aid.

Determine Where You Will Spend Your Money

Keep track of your spending for at least a week. You’ll be amazed at how your cash disappears. Apart from making you more conscious of your spending habits, expense tracking can help you find every splurge that causes excessive outflow. Find areas where you can reduce your spending (be honest! ), And you’ll be amazed at how much your expenditure adds up.

Create a Plan to Reduce Your Credit

Once you’ve identified your savings, create a plan to cut down on your debt. There are several ways to do this, one of which is snowballs. Two well-known strategies are snowballs and Avalanches. The snowball approach suggests taking care of your lowest debt, beginning with your smallest debt and moving towards your most significant. The avalanche method indicates that it is more beneficial to address your most interesting deficit first. Whatever the case, the result is identical. The debt is cleared more quickly, and you also reduce the amount of DTI.

Find ways to make your Credit Less Expensive

If you’re struggling with excessively high-interest debt on your credit cards, you should try to find lower-cost debt alternatives. It’s a good idea to start by asking your creditors for a lower rate. If you have a house, it is possible to consider an equity loan for your home to reduce your debt. It is possible to apply for an individual loan that has an agreed-upon repayment plan. In some instances (but be sure to read the rest! ), it may be beneficial to take out the lowest interest rate credit card and then transfer your balances before cutting down the original cards!

Another option is to lower your credit card fees or even eliminate your credit card. A lower amount of charges on your credit card can reduce the amount of payments you’ll need to pay shortly. Be old-fashioned and make use of cash to pay for things such as clothes and food. Limiting your spending to cash-based purchases can help you save money on everyday purchases, which can then be put towards paying off debt. This method is not a source of interest and can aid in increasing your awareness about managing your finances.

Avoid Adding New Debt

As you pay down your existing debts, you shouldn’t add any more credit. Even if there’s no need for an additional credit card, however, the fact that you already have one that you might utilize will be a red flag for lenders.

Let’s take this as an example. You’re making a responsible purchase for things you need, and you have cash in your account. You go to the cashier, and the cashier helpfully informs you that you can cut 25percent of the amount if you choose to apply for a credit card at the store. You think that you’d prefer to pay with cash. However, you believe that if you could save that 15%, you can indulge in a meal guilt-free. The cashier says that you can sign up for a credit card, take advantage of a 25% discount, and then pay with cash. In a matter of seconds, the transaction is completed, and you’re off to a more delicious meal than you had planned.

This is the problem. To the eyes of potential lenders, you’ve raised the risk of having debt. If you do this one time, it may make you look a bit shady. However, repeat it several times, and you’ll have created a greater issue for you. Keep in mind that there’s nothing like an unpaid lunch!

However, If you can get a credit card that has the lowest (or even zero percent) initial rate, it could be worth moving your balances with higher interest to it. In this way, you won’t have to pay any additional interest charges when you pay off the amount. To make this happen from a DTI perspective, you must officially close any other credit accounts and adhere to the payoff schedule.

You will be rewarded when you can apply for a mortgage. Your lower DTI can help you be eligible for lower interest rates as well as better terms on loans.


In simple terms, your debt-to-income ratio (DTI) is the proportion of your income that goes to each month’s debt repayments. It’s vital since lenders utilize it to determine whether you’re a safe credit risk and ensure you are eligible for the best rates and terms to help you reach your homeownership goals.