The debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments and is used by lenders to determine your borrowing risk. Below is an example of how Debt to Income is calculated.
- mortgage: $1,000
- car loan: $500
- credit cards: $500
- gross income: $6,000
John's total monthly debt payment is $2,000:
$2,000=$1,000+$500+$500
John's DTI ratio is 0.33:
0.33=$2,000÷$6,000
In other words, John has a 33% debt-to-income ratio.
Below is a general guidelines for how banks view Debt to Income -
- 5% or less is generally viewed as favorable, and your debt is manageable. You likely have money remaining after paying monthly bills.
- 36% to 49% means your DTI ratio is adequate, but you have room for improvement. Lenders might ask for other eligibility requirements.
- 50% or higher DTI ratio means you have limited money to save or spend. As a result, you won't likely have money to handle an unforeseen event and will have limited borrowing options
If Debt-to-Income is to high banks can look at that and potentially be worried about your ability to repay debt.
The maximum acceptable DTI ratio varies depending on the lender. As a guideline, it is preferable to achieve a ratio that is lower than 36%
i.e: student loans, mortgages and how much the effect funding opportunities.
