What Is a Good Debt-to-Income Ratio?
- A good debt-to-income (DTI) ratio is 35% or lower, but you may still qualify for a mortgage or loan with a DTI ratio as high as 50%.
- Your debt-to-income ratio is a number that compares how much debt you have to how much money you make.
- Banks and lenders use this number to decide whether to offer you a mortgage, loan or credit card. The lower your DTI ratio, the better your odds of approval and being offered competitive rates.
What is considered a good debt-to-income ratio?
Lenders consider a debt-to-income (DTI) ratio of 35% or lower to be good. But you could still get approved for a credit card or loan with a higher DTI ratio — you’re just likely to pay more in interest.
Your debt-to-income ratio shows how much of your gross monthly income you spend on repaying debt like credit cards, car loans and mortgages.
Here’s why your debt-to-income ratio matters:
- Better odds of approval. All lenders and credit card companies consider your DTI ratio to decide whether to offer you a loan or credit card.
- Lower rates. Lenders also use your DTI ratio to determine your rates. The lower your DTI ratio, the better chance you’ll be offered the most competitive rates (which makes your loan cheaper).
- Financial thermometer. You can use your DTI ratio to take the temperature of your finances. A DTI ratio above 50% means you’re in hot water and may have trouble making payments and getting approved for new lines of credit. Below 35%? You’re in the clear.
According to LendingTree studies, 5.1% of Americans with auto loans are delinquent on at least one account, while 3.05% of Americans’ total outstanding credit card balances are at least 30 days delinquent. You can avoid delinquencies and take your financial power back by keeping your DTI ratio as low as possible. Doing so gives you wiggle room in case of financial emergencies.
DTI ratios for loans and credit cards
| Type of credit | Good DTI ratio | Maximum DTI ratio | |
|---|---|---|---|
| Mortgage | 36% or lower | 41% – 45% (up to 50% in some cases) | More mortgage requirements |
| Credit card | 36% or lower | 43% – 50% | More on how to get a credit card |
| Car loan | 35% or lower | 46% – 50% | More car loan requirements |
| Personal loan | 35% or lower | 43% – 50% | More personal loan requirements |
| HELOC/Home equity loan | 35% or lower | 43% | More home equity loan requirements |
How to calculate debt-to-income ratio
Pro tip: Calculating your DTI ratio can be time-consuming. Use the LendingTree debt-to-income ratio calculator to skip all the math below.
- Calculate your gross monthly income. First, calculate your annual income. Include your income before taxes, commissions, bonuses, overtime and tips and other income from rental properties, investments, alimony and child support. Divide this number by 12.
- Add up your monthly debt payments. This includes your car payments, student loan payments, credit card payments and housing payments. Add the payment for the debt you’re applying for — like your new mortgage or car payment.
- Divide. You’ll divide your monthly debt payments by your gross monthly income to get your DTI ratio.
For example, if your gross monthly income is $6,000 and your monthly debt payments are $3,200, your DTI ratio is 40%.
When you apply for a mortgage, lenders can also look at your front-end DTI ratio — how much of your income goes toward your monthly mortgage payment. Ideally, they like to see it at 28% or less.
How to improve DTI ratio
Pay off debt
- Use debt repayment strategies. Knock out your debts smallest to largest with the debt snowball method or highest-to-lowest interest rate with the debt avalanche method.
- Consolidate debt. Debt consolidation loans and balance transfer credit cards can help you save money and pay off debt faster.
- Ask for lower interest rates. Did you know that 83% of cardholders got a lower rate just by asking? Give your lender or credit card company a call.
- Consider debt relief. If your debt payments are keeping you up at night, it’s time to look into debt relief options to get some financial breathing room.
Raise income
- Ask for a raise. It’s easier said than done, but 82% of full-time workers who asked for a pay raise got one.
- Start a side hustle. Join nearly 40% of Americans who currently have a side hustle to make extra income.
- Consider other ways to make money. Here are 20 ways to make some extra cash to boost your income and lower your DTI ratio.
Frequently asked questions
Lenders consider both your DTI ratio and your credit score when deciding to lend you money. How much debt you owe is one of two factors that determines your DTI ratio, but it’s a much smaller factor in your credit score as part of your credit utilization ratio.
You can calculate your DTI ratio, but you’ll have to check your credit score with your bank or by using a free service like LendingTree Spring. Checking your score doesn’t lower it.
Your DTI ratio measures how much of your income goes to debt, while your credit utilization ratio measures how much of your revolving credit you’re actually using.
Unlike your DTI ratio, your credit utilization ratio doesn’t include loans (such as car loans, personal loans or mortgages). But while your DTI ratio doesn’t directly impact your credit score, your credit utilization represents up to 30% of your credit score.
Recurring debts count toward your DTI ratio. Add up your housing costs (mortgage or rent payments, insurance, HOA fees, taxes), HELOC or home equity payments, personal loan payments, student or auto loan payments, buy now, pay later loan payments, credit card payments and any other debts like alimony or child support payments.
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