The debt-to-income (DTI) ratio measures the amount of income a person or organization generates in order to service a debt. As explained by the Consumer Financial Protection Bureau, your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow. Traditionally, lenders have said that your housing costs (mortgage principal and interest, homeowner's insurance, and property taxes, also known as PITI) shouldn't exceed 28% of your gross income, and that your overall debt (PITI plus car and other loan payments) shouldn't exceed 36%.
To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. For instance, if you pay $2,000 a month for a mortgage, $300 a month for an auto loan and $700 a month for your credit card balance, you have a total monthly debt of $3,000. If your gross monthly income is $7,000, then your debt-to-income ratio is 42.8%. ($3000 is 42.8% of $7000).
Most lenders would like your debt-to-income ratio to be under 36%. However, you can receive a “qualified” mortgage (one that meets certain borrower and lender standards) with a debt-to-income ratio as high as 43%.
[Last updated in July of 2021 by the Wex Definitions Team]
