Updated: Jun 15, 2020
This is probably one of the most important equations you need to know. This is used many times over in personal finances. It compares an individuals debt payment to his/her overall gross monthly income(before taxes are taken out and other deductions). This ratio shows the percentage of your gross monthly income that goes toward paying your monthly debts.
Why is this ratio so important to lenders? Most lenders feel that if you have a DTI over 43% that you are more likely than not to default on your loan or mortgage. Lenders would like you to have the ratio closer to 28%. And then when you add in all your current expenses, it should not be any higher than 36%!
So know what the lender feel is ideal, take heed and you this information to set yourself up for success. There are ways to lower you DTI , if you are planning to buy a house in the near future.
Pay more towards you debt each month. Just adding a little extra to your payment can help to get you debt lower and lower you DTI.
Do your best not to take on more debt, pay for everything with your debit card or with cash
Move out large purchase to a future date when it will more feasible to your budget to handle the purchase.
Calculate your debt-to-income ratio monthly when you pay your bills. That way you can see all the progress you are making.