Debt to Income Ratio
Determine your debt-to-income ratio to understand your borrowing capacity, assess financial health, and prepare for mortgage applications
Formula
DTI = Monthly Debt / Monthly Income
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100. For example: $2,000 monthly debt ÷ $6,000 monthly income = 33% DTI. Lenders typically require DTI below 43% for mortgage qualification.
Worked Examples
Example 1: Calculate DTI
Problem:$6,000 income, $1,800 housing, $400 car, $200 cards.
Solution:Total debt: $2,400\nDTI = $2,400 / $6,000 = 40%
Result:40% DTI
Frequently Asked Questions
What is DTI ratio?
Total monthly debt payments ÷ gross monthly income. Lenders use it to assess loan eligibility.
What is the debt snowball vs debt avalanche method?
The debt snowball method pays off debts smallest-to-largest regardless of interest rate, providing psychological wins. The debt avalanche method pays off highest-interest debts first, saving more money mathematically. Both require making minimum payments on all debts while putting extra money toward the target debt.
How does debt consolidation work mathematically?
Debt consolidation combines multiple debts into one loan, ideally at a lower interest rate. Calculate total current monthly payments and total interest paid over remaining terms. Compare to the consolidated loan's monthly payment, total interest, and any fees. Consolidation saves money only if the new rate is lower and you do not extend the term significantly.