One thing you learn quickly working at LendingTree is that the financial world is filled with acronyms. Here’s one that you might have seen, and is actually pretty important: DTI, that stands for Debt to Income.
Your (DTI) is expressed in a ratio (via percentage). Think of it as your debt vs. your income. Your DTI ratio is something lenders look at when you apply for a loan. Together with your credit score (and other factors), it can help determine what kind of offer you’ll receive.
A ratio of 20 percent or lower is considered excellent. That means you’ve got 80 percent of your income to work with after all your debts are paid each month. Higher ratios tell lenders that much of your money is already earmarked for other payments. Once you get to 40 percent or more, you’ll have a tough time getting large loans, like a mortgage.
It makes sense—if most of your existing money is wrapped up in paying down debt, there’s not going to be room for much more. It’s a risky move to lend someone money when nearly half their money is going to existing debt payments.
How do you find your DTI ratio?
First, take all the debt you pay each month, including monthly rent, mortgage payments, student loans, credit cards, medical bills, childcare and any other revolving expense. Add all those expenses together and then divide that total by your gross monthly income (that’s your monthly income before taxes). The resulting number from this simple equation is your DTI ratio.
So, let’s say you pay $1,000 in rent, $300 in student loans and $250 on a car loan every month; that’s $1,550 in debt payments. You make $60K a year, so $5,000 a month. That puts your DTI at 31percent, which isn’t necessarily bad, but getting it into the 20s would be even better if you want more competitive loan offers.
So, what do you do if your DTI is too high?
From LendingTree’s helpful app, to articles like this one from MagnifyMoney, if you want to lower your DTI, you’re in the right place.
Your DTI ratio is a rough number. It doesn’t take into account other expenses you likely have— groceries, certain home services, clothing, gas — you know, things you still need money for. Just like getting a loan, your DTI ratio should be one of many factors when planning a budget.