Estimating Your DTI Ratio
This calculator can be used to estimate a person’s debt-to-income ratio, also known as the DTI ratio. The calculator requires a total of nine inputs, including:
- Sources of monthly income, including both paychecks on a before-tax basis as well as other sources of monthly income
- Monthly debt payments, including those associated with a mortgage, apartment rent, a car loan or lease payment, personal loans, credit cards (minimums), student loans, or any other form of monthly debt payments
The calculator then provides the user with three outputs, including:
- The total monthly, before-tax income
- The total debt payments made each month
- Finally, the debt ratio, or debt-to-income ratio
Debt-to-Income (DTI) Calculations
The calculations performed by this online calculator are straightforward. The sources of monthly income (on a before-tax basis) are added together to develop a monthly total. The same process occurs for all the monthly debt obligations to estimate the total monthly debt payments. The total debt is then divided by the total income to estimate the debt-to-income ratio, or DTI ratio. Lenders will calculate a borrower’s DTI ratio as part of their due diligence before writing a loan. The ratio is a good indicator of the borrower’s ability to repay their loan. The DTI ratio, along with the borrower’s credit score, will help the lender understand if the person or household can take on more debt as well as whether they are repaying existing debt on time.
Evaluating DTI Ratios
DTI ratios provide lenders with a view of the borrower’s balance between debt and income. For example, a ratio of 10% means that 10% of the gross income of the household goes towards paying debt. Generally, there are three DTI thresholds, or rules of thumb, that lenders follow:
- No more than 28% of a household’s gross income should be allocated to payments associated with a home, such as mortgage or rent payments. This ratio can be found using this calculator by including all monthly income and only the debt associated with the home.
- No more than 36% of a household’s gross income should be allocated to all debt payments. This ratio can be found by completing all the inputs used by this calculator.
- Finally, a borrower cannot get a Qualified Mortgage if their DTI ratio is higher than 43%.
What is a Qualified Mortgage?
Before writing any loan, a lender is required to make a good faith effort to determine if the borrower has the financial resources at their disposal to repay the loan. This is known as the ability-to-repay rule. If the lender offers a Qualified Mortgage, that means the borrower has passed certain requirements such as the ability-to-repay standard.
Qualified Mortgages offer borrowers a number of protections. For example, loans cannot be for longer than 30 years, result in negative amortization, or include interest-only payments. Qualified Mortgages also protect borrowers from excess fees or upfront points. The risk of non-payment rises as the DTI increases. When the borrower’s DTI rises above 43%, lenders are no longer required to offer borrower’s the protections offered by a Qualified Mortgage. That is why 43% is such an important value when evaluating someone’s DTI.