Your debt-to-income ratio, otherwise known as DTI, plays an important role with applying for a loan. DTI is the percentage of your gross monthly income (pre tax) that is taken up by your monthly debt payments. When you apply for a loan, lenders will look at your current monthly payments and your projected monthly payments on your new debt. They will then calculate that with your income and your DTI will then be determined. The lender will then decide whether or not you will be able to afford the payment. The lower your DTI is, the better chance you have in qualifying for a new loan.
How to calculate your DTI
Calculating your DTI is simple. Add up all your debt including credit cards, car loans, student loans, mortgages, etc. You do not have to include bills such as your gas and electric bills, garbage, phone, or electric.
Divide the total amount of debt that you pay each month by your gross monthly income (pre tax). The percentage that you receive at the end of that calculation is your DTI.
Lowering your debt-to-income ratio
40% is generally the highest lenders want to see your debt-to-income ratio. Depending on where you are looking to get a loan or the loan that you are looking at, they may require you to have a lower percentage.
The way to lower your DTI is by paying down your debt. The lower your debt, the lower your DTI will be.