Guide
What is your debt to income ratio?
By Mike Mulik · Published · Updated
I design digital products and build free tools. Not a financial advisor, what that means.
When you apply for a mortgage, the bank is really asking one question: if we lend you this money, can you actually pay it back every month?
Your credit score doesn't answer that. A credit score says whether you've paid your bills on time in the past. It says nothing about whether you have any room left in your budget.
So lenders use a second number, and it's called your debt to income ratio. People shorten it to DTI. It's the percentage of your monthly income that's already promised to debt payments before you've bought a single thing.
It's a genuinely useful number to know about yourself, and it takes about a minute to work out.
How to work it out
Two steps.
Step one. Add up what you pay every month toward debt. Just the required payments, not what you'd like to pay.
Step two. Divide that by your monthly income before tax. Then multiply by 100 to make it a percentage.
That's it. Here's a real one.
Say you earn $72,000 a year, which is $6,000 a month before tax. And every month you owe:
Your debt to income ratio is 40%. Forty cents of every dollar you earn is spoken for before you buy groceries.
Before tax, not after
This part confuses everyone, so it's worth being clear about it.
Lenders use your income before tax comes out. That's called your gross income. It's the salary number on your job offer, not the amount that lands in your bank account.
This makes your ratio look better than it feels, because you never actually see that money. If your ratio is 40% on paper, the share of your real take home pay going to debt is closer to half. Lenders know this. It's just how the calculation has always been done.
If you're self employed or your income varies, lenders usually average the last two years. Use a realistic monthly average rather than your best month.
What counts, and what doesn't
Only certain things go in the top half of the sum, and the rule is simpler than it looks: it counts if it's a debt or a housing payment. Groceries aren't debt. Neither is your phone bill.
Include:
- Rent, or your mortgage payment
- Property tax and home insurance, if they're not already in your mortgage payment
- Car loan or lease payments
- The minimum payments on your credit cards, not what you actually pay
- Student loan payments
- Personal loans
- Court ordered payments like child support or alimony
Leave out:
- Groceries, gas, utilities, phone, internet
- Insurance that isn't tied to your house
- Subscriptions
- Savings and retirement contributions
- Anything you pay for in full with a card each month and don't carry a balance on
One thing worth flagging: cards use the minimum payment, even if you pay far more than that. Card minimums do shrink slowly as the balance falls, so paying one down helps your ratio a little, but the real gain comes when the balance is gone and the payment disappears from the sum entirely. It's a slightly annoying quirk of the calculation, and it's why clearing a small card completely can move your ratio more than making a big payment on a large one.
What's a good number?
Rough guide. These aren't hard laws, and different lenders draw lines in different places.
| Your ratio | Roughly what it means |
|---|---|
| Under 20% | Very comfortable. Lots of room. |
| 20% to 36% | Healthy. Most lenders are happy here. |
| 36% to 43% | Getting tight. Still approvable for most things. |
| 43% to 50% | Difficult. Many mortgage lenders stop around here. |
| Over 50% | More than half your income is committed. This is the range where one unexpected bill causes real problems. |
The number to remember is 43%. That's the traditional ceiling for a lot of mortgage lending, and while there's more flexibility now than there used to be, it's still the level where things get noticeably harder.
If you're over 50%, that's not a moral failing and it's more common than people admit. But it is the point where the math stops working on its own, and it's worth talking to a nonprofit credit counselling agency. Their first conversation is normally free. In the United States, look for one accredited by the National Foundation for Credit Counseling, or NFCC. In Canada, a Licensed Insolvency Trustee, or LIT, or a member agency of Credit Counselling Canada.
The two ratio thing
If you're applying for a mortgage, you may hear two numbers instead of one.
The front end ratio counts only your housing costs against your income. Lenders often want this under about 28%.
The back end ratio counts everything, housing plus all your other debt. This is the one people mean when they just say “debt to income ratio,” and it's the 43% figure above.
So a mortgage lender can turn you down for either. Your housing might be fine on its own but the car loan and cards push the total too high.
How to improve it
There are exactly two levers. Earn more, or owe less. That's the whole thing.
Owe less, in order of usefulness:
- Clear a small debt completely. This is the fastest lever, because the calculation only cares about your monthly payment, not your balance. Wiping out a $150 a month payment does more for your ratio than putting $3,000 against a big one.
- Don't take on anything new. Especially a car. A car payment is the single most common reason someone's ratio is too high for a mortgage.
- Pay your cards down to zero, not just down. Minimums shrink as your balance shrinks, so partial progress helps a little, but the real gain is when the payment disappears.
Earn more:
Anything documented and stable counts. A raise, a second job, or freelance income with a couple of years of tax returns behind it. A one off bonus generally doesn't help, because lenders want to see income they can count on.
One thing to be careful about. Lowering your monthly payment by stretching a loan over more years will improve your ratio while making the debt cost more overall. That's a real trade off, not a free win. There's more on that in is a debt consolidation loan a good idea.
See where you'd land
Your ratio tells you where you stand today. It doesn't tell you when you'd be free of the debt, or what it's costing you to carry it.
For that, put your balances into the debt payoff calculator. It'll show you your debt free date and how much sooner you'd get there by paying a bit more each month, which is the thing that actually moves your ratio. If you're deciding which debt to clear first, snowball vs. avalanche covers the two usual orders.
Frequently asked questions
What is a good debt to income ratio?
Under 36% is comfortable and most lenders are happy with it. Between 36% and 43% is workable but tight. Above 43% you'll start getting turned down for mortgages, and above 50% more than half your income is committed to debt before you've bought anything.
Do I use my income before or after tax?
Before tax. Lenders use your gross monthly income, which is your annual salary divided by 12. This makes your ratio look better than it feels day to day, since you never see that money, but it's the standard everyone uses.
Does rent count in a debt to income ratio?
Yes. Housing counts whether you rent or own. If you're applying for a mortgage, the lender will use the new mortgage payment rather than your current rent, since that's the payment you'd actually be making.
Do utilities and groceries count?
No. Only debt payments and housing go into the calculation. Phone bills, internet, electricity, insurance that isn't tied to your home, subscriptions and food are all left out. That's why your ratio can look reasonable while your budget still feels impossible.
Does paying down a credit card improve my ratio?
A little, and less than you'd expect. The calculation uses your minimum payment, which shrinks slowly as your balance falls. The big improvement comes when a debt is gone completely and the payment disappears from the top of the sum. That's why clearing one small debt often helps more than making a large payment on a big one.
What's the difference between front end and back end ratio?
Front end counts only your housing costs against your income, and lenders often want it under about 28%. Back end counts all your debt including housing, and that's the number with the 43% ceiling. Mortgage lenders look at both.