What Is a Good Debt-to-Income Ratio?

If you’re applying for a loan, one of the first numbers lenders look at is your debt-to-income (DTI) ratio. It’s a simple calculation that tells lenders how much of your monthly income is already spoken for by debt payments. DTI also reveals how much room you have to take on an additional payment. 

What’s a good DTI ratio? In most cases, lenders like to see a DTI of 36% or lower. However, that threshold can vary. 

Discover answers to the question, “What is a good debt-to-income ratio?” so that you can manage your DTI and position yourself as a stronger applicant when taking out loans in the future.

What is a good debt-to-income ratio to borrow money?

A good DTI is typically considered 36% or less, meaning no more than 36% of your gross monthly income goes toward debt payments. 

Depending on other factors, such as your credit score and financial profile, lenders may accept you with a higher DTI. However, it’s very difficult to get approved for a major loan, such as a vehicle loan or mortgage, if your DTI is above 50%. 

How DTI is calculated

Your DTI ratio compares your monthly debt payments to your gross monthly income (how much you earn before taxes). Here’s the formula:

DTI = (total monthly debt payments / gross monthly income) x 100

Imagine your monthly debt payments are $1,800 and your gross monthly income is $5,000. In that scenario, the DTI calculation would be as follows:

DTI = (1,800 / 5,000) x 100 = 36%

The following are considered monthly debt payments:

• Rent or mortgage
• Credit card minimum payments
• Auto loans
• Student loans
• Personal loans
• Child support or alimony 

Expenses like groceries, utilities, and gas usually aren’t included as part of your DTI. 

Front-end vs. back-end DTI

Lenders look at two types of DTI, which are:

• Front-End DTI: Housing costs only, such as rent or mortgage, property taxes, and insurance 
• Back-End DTI: Includes all of your monthly debt obligations

Back-end DTI is the more important number, especially with mortgages. Lenders will look at your current DTI and what your back-end DTI will be after you take on the mortgage payment. A good DTI ratio for mortgage approval is one that falls below a lender’s threshold. 

What lenders look for in a DTI ratio

Different types of lenders have slightly different standards, but all use DTI to assess risk. Here’s how mortgage lenders and auto/personal loan lenders evaluate your debt-to-income ratio. 

Mortgage lenders

When it comes to a good DTI ratio for mortgage approval, most lenders prefer you to be at or below 36%. However, many lenders will approve you with a DTI of up to 43%, provided you are well-qualified in other areas. 

Some loan programs allow higher DTIs, but you have to meet other compensating factors, such as demonstrating that you have a large savings. 

Auto and personal loan lenders

The threshold for auto or personal loans tends to be higher. Many lenders prefer a DTI below 40-45%. Some lenders may even approve you with a higher debt-to-income ratio if your credit profile is strong. 

Unfortunately, taking on a loan when your DTI is already high can have consequences, such as:

• Higher interest rates
• Lower loan amounts
• Stricter terms

Even if you do get approved for a loan when you have a high DTI, you should make sure the additional debt payment won’t be overwhelming. There’s a reason that lenders use DTI as a tool for evaluating your loan worthiness. 

How a high DTI affects your ability to borrow

A higher debt-to-income ratio indicates that a huge chunk of your income is already committed to debt payments. The impacts include:

• Lower approval odds
• Higher interest rates
• Reduced borrowing power 
• Stricter requirements

Even if you get approved, borrowing when your DTI is already high can leave you strapped for cash each month. 

How to lower your debt-to-income ratio

If your DTI is higher than you’d like, or if it’s hindering your ability to qualify for a mortgage or auto loan, you can do something about it. 

Pay down existing debt

Reducing your outstanding balances is one of the most effective ways to lower your DTI. You can:

• Pay off high-interest credit cards
• Make extra payments on loans when possible
• Keep revolving balances low

As your minimum credit card payments drop, your DTI will drop too. However, the only way to remove an installment loan from your DTI calculation is to pay it off. 

Increase your income

Boosting your income lowers your DTI from the other side of the equation. You can take on a side hustle, pursue a raise or promotion, or switch to a higher-paying role. Unfortunately, increasing your income can be tough, especially if you are already strapped for time. 

Manage your credit journey today

Kikoff is a credit-building platform that includes tools for improving your credit score. Features include verified rent reporting, debt dispute tools, and a free credit account. While Kikoff won’t directly help you lower your DTI, it can provide you with a better understanding of your financial profile and add positive payment history to your profile. 

Build credit responsibly with Kikoff’s plans.