DTI (Debt to Income Ratio)

DTI Definition

A debt-income-ratio (DTI) is a ratio that shows what percentage of income is going toward the debt.

Explanation

Your debt-to-income ratio (DTI) is the percentage of your monthly income that goes towards expenses e.g. rent, mortgage, credit cards, or other debt.

Gross monthly income is the income before tax.

This ratio is an important indicator of your ability to pay the interest on the loan and still have enough income available for your basic needs.

It also shows how much loan you are able to afford. By looking at your total expenses, the lender can also gauge how responsible you are in spending your money.

The ratio can be calculated as follows:

1. Sum of all of your income before taxes
2. Sum of all of your expenses
3. Calculate it by using this formula: Total Expenses / Total Income * 100

For example, let’s say your income is $10,000 per month and the expenses are $2,000 per month. Then your DTI is $2,000/$10,000 = 0.5 * 100 = 50%

A lower DTI is better for you as a whole from a financial management standpoint.

Being responsible by borrowing money and spending it only when needed would help you keep this ratio lower.

It helps when you really need to borrow money, let’s say for a business loan or for a real estate loan.

Generally speaking, you want your DTI to be < 25%. If that is not the case, then don’t panic. Create a financial plan to pay off your debt and work towards reducing your DTI.

 

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