Lenders use debt-to-income ratio (DTI) — along with credit history — to evaluate whether a borrower can repay a loan.
- To calculate your DTI, add up the payments you owe, such as rent or mortgage, student loan, auto loan payments, personal loans, credit card minimums, and other regular monthly payments towards other debts.
- Then you will divide your total by your gross monthly income. A total monthly debt payment of $2000 divided by a gross monthly income of $6000 is a DTI of 33%.
- There are online calculators on websites like Nerd Wallet and Bankrate that will do the calculations for you.
- After calculating your DTI ratio, if your DTI ratio is low, such as below 36%, lenders see you as having debts that are manageable compared to your income and will be likely to lend you money.
What are some tips to lower your DTI?
- Start a debt payment plan to pay down and/or pay off debts to reduce monthly debt payments.
- Increase your monthly gross income.
- Do Both! Increase your monthly gross income and reduce monthly debt payments.
Need help reducing your DTI ratio?
Family Houston offers free financial coaching to assist with creating debt repayment plans to reduce or pay off debts. Contact Family Houston today to start working with a financial coach. 713-861-4849