Your debt-to-income (DTI) ratio is a personal finance measure that compares the amount of debt you have to your overall income. Lenders, including mortgage, auto, and personal loan providers, use the DTI ratio as a measure of your ability to manage monthly payments and repay debts.
How DTI Affects Your Financial Health
35% or less: Good
You're likely managing your debt well and should qualify for most loans at favorable terms. You have a good margin of income available for savings and unexpected expenses.
36% to 43%: Fair
You still qualify for most conventional mortgages, but your financial situation shows some stress. Consider reducing debt before taking on new loans.
43% to 50%: Poor
You may have difficulty qualifying for conventional mortgages. Many lenders consider this ratio too high. Focus on reducing your debt.
Over 50%: High Risk
This indicates financial distress. You'll have difficulty qualifying for most loans. Strongly consider consulting with a financial advisor about debt reduction strategies.
Tips to Improve Your DTI
- Increase your income through side jobs, overtime, or asking for a raise
- Reduce your debt by paying down credit cards and loans
- Avoid taking on new debt until your DTI improves
- Try debt snowball or avalanche methods to accelerate debt reduction
- Consider refinancing to lower your monthly payments