When lenders evaluate you for a loan, one of the most important metrics they check is your debt-to-income ratio (DTI). But what exactly is it, and how does it affect your financial future?
What is DTI?
Your DTI is the percentage of your gross monthly income that goes toward paying debts.
Formula:
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Example:
If you make $4,000/month and pay $1,200 in debts, your DTI is 30%.
Why Lenders Care:
DTI shows how much of your income is tied up in existing obligations. A lower DTI means you have more capacity to take on new credit.
Ideal DTI by Loan Type:
- Conventional mortgage: ≤ 36%
- FHA loan: ≤ 43%
- Personal loans: ≤ 40% preferred
- Credit cards: No strict rule, but lower is better
How to Improve Your DTI:
- Pay down debt: Focus on credit cards or personal loans.
- Increase income: Side hustles or freelance work can shift your ratio.
- Avoid new debt: Limit borrowing until your DTI improves.
A healthy DTI not only boosts your loan eligibility—it’s also a sign of sound financial health. Regularly monitor it and adjust your spending accordingly.
