Debt-to-Income Ratio Calculator

Calculate your debt-to-income ratio using the calculator below. Use the simple mode to enter your regular monthly debt and income or the advanced mode to enter a breakdown for each.

By

Joseph Rich, MS in Finance

Joseph Rich holds a Bachelor's degree in economics and Master's degree in finance, and specializes in economics and investing analysis.

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How to Calculate Debt-to-Income Ratio

The Debt-to-Income (DTI) ratio measures how much debt someone pays out of their monthly income. As the name suggests, it is a ratio of debt to income. The various forms of debt payments could be for a mortgage/rent, car loan, student loan, credit card, or personal loan.

Banks and credit unions use the DTI ratio to qualify individuals for a loan. The cutoff point these financial institutions use is 36%—your debt cannot be more than 36% of your income. A higher DTI ratio indicates an individual may not be able to take on more debt, and it may be harder to obtain another loan.

A DTI ratio under this threshold shows that the individual most likely can take on additional debt, and it will be easier to obtain financing.

Debt-to-Income Ratio Formula

The debt-to-income ratio formula is as exactly as it sounds. It is calculated as the monthly debt payment divided by the gross monthly income and is shown below.

DTI ratio = monthly debt payments / gross monthly income

The calculator above has two modes: simple and advanced.

The simple tab combines all of the debt payments into one value and all income sources into one value. The advanced tab separates the debt payments into the different forms of debt and the gross monthly income into the different sources of income.
Both calculators use the same formula shown above.

Example

Let’s look at two individuals, Jack and Jill, to calculate their DTI ratios and see the likelihood of acquiring an additional loan.

Jill currently makes $84,000 per year. Her monthly debt payment totals $3,000 per month. This includes her rent payment ($1,900), auto loan payment ($600), student loan payment ($400), and credit card payment ($100).

First, we need to calculate the gross monthly income, which is $7,000 ($84,000/12).The DTI ratio is:

DTI ratio = $3,000 / $7,000
DTI ratio = 42.86%

Since this is higher than the 36% threshold, Jill will probably have a hard time getting financing for any additional debt. She would need to reduce her monthly debt payment by $480 to $2,520 per month to be at the 36% DTI ratio threshold.

Jack makes $75,000 per year. His monthly debt payment is $1,800 per month, which includes only his mortgage payment. His monthly gross income is $6,250.

DTI ratio = $1,800 / $6,250
DTI ratio = 28.80%

His DTI ratio is below the threshold so he would probably have better success securing an additional loan. He could even increase his monthly debt payment by $450 to $2,250 and still be at the 36% threshold.

What Makes up the Debt-to-Income Ratio?

There are a few variations of debt-to-income ratio that are used.

Front-End Ratio

The front-end ratio (FE ratio) is a variation of the DTI ratio that only looks at housing costs. The housing costs include the principal and interest payment, taxes, insurance, and homeowner’s association dues. It does not include lawn care, utilities, or other maintenance.

The front-end ratio is calculated using the formula below:

FE Ratio = monthly housing costs / gross monthly income

Since this excludes consumer debt such as credit card payments, student loan payments, auto payments, and personal loan payments, the threshold for this ratio is 28%. Anything above this threshold is characterized as spending too much on housing. Anything below 28% shows that the individual’s housing spending is within their limits.

Back-End Ratio

The back-end ratio includes housing costs as well as all other forms of debt and is the same calculation we examined in the DTI ratio sections.

We have already calculated the back-end ratios for Jack and Jill, but now we can calculate the front-end ratios for them as well.

Jill has a monthly rental payment of $1,900 and a monthly gross income of $7,000. Her front-end ratio is calculated as

DTI ratio = $1,900 / $7,000
DTI ratio = 27.14%

Jill is under the threshold when using the front-end ratio, but over it when using the back-end ratio because Jill has a high level of consumer debt including auto and student loan and credit card payments. She could be under the 36% back-end ratio by doing the following:

1. Lower her debt by $480 per month by either paying off both the student loan and credit card or paying off only the auto loan.
2. Increase her gross income from $84,000 to $100,000 per year or from $7,000 to $8,333 per month.
3. Some combination in-between.

Since Jack has no debt outside of his mortgage, his front-end and back-end ratios are the same at 28.80%. According to the front-end ratio, he is spending too much on housing although he is barely over the 28% threshold, and he is within limits when you look at his back-end ratio.

Since his mortgage payment is probably fixed at least in the short term, the only way he could be under 28% is by increasing his income from $75,000 to $77,143 per year or from $6,250 to $6,429 per month.

How do Lenders Use the Debt-to-Income Ratio?

Lenders use the DTI ratio in aiding the decision to extend a loan or not. It is just one of the factors and not the end-all-be-all. Other factors include employment status, credit score, borrower history, and loan-to-value if there is collateral attached to the loan.

The lower the DTI ratio, the better success someone may have in obtaining a loan. Someone who is right at the 36% back-end ratio will have more trouble getting a loan compared to someone who is at a 20% back-end ratio, all else being equal.

The phrase “all else being equal” is important to include. If the individual with a 36% back-end ratio has a great credit score, a high and steady stream of income, and has collateral (such as a car) attached to the loan, they will have a good chance of getting the loan.

However, if the individual with a 20% back-end ratio has a low credit score, inconsistent flow of income, and has no collateral, the individual will have a harder time acquiring financing.

In our example with Jack and Jill, the bank will see everything that we have pointed out here. They will see that Jack is above the 28% front-end ratio but below the 36% back-end ratio. They will also see that Jill is above the 36% back-end ratio but below the 28% front-end ratio.

Since the bank looks at all forms of debt, they will prefer to see a lower back-end ratio. With all else being equal (same credit score, borrower history, etc.), Jack will have an easier time getting another loan. Nearly half of Jill’s monthly income goes to debt payments so she is spending too much on debt.

What is a Good Debt-to-Income Ratio?

A good DTI ratio is below both the front-end and back-end ratios and also one that the individual can live comfortably on. Due to differences in the cost of living, DTI ratios can mean different things.

For example, a DTI ratio of 20% in a high cost-of-living state may be more of a burden than a 30% DTI ratio in a low cost-of-living state. Expenses, such as food, transportation, and utilities, are not included in the DTI and will be higher in the high cost-of-living state than in a low cost-of-living state.

Individuals also have different tolerances for debt. If an individual does not like to use debt, they will probably have a lower ratio and may only have their housing costs as part of the DTI ratio.

But someone who is more comfortable with debt may be fine with a front-end ratio of 28% and a back-end ratio of 36% and they would need to consider that it may be more difficult to acquire additional financing.