How can I calculate my debt-to-income ratio?

Your debt-to-income (DTI) ratio is a measurement of how much of your monthly income goes toward paying debts. It can be calculated by dividing your monthly debt obligations by your gross monthly income. The formula looks like this:

DTI =(Monthly debt payments) / (Gross monthly income)

To calculate your debt-to-income ratio, add up all your monthly debt payments, including credit card payments, car loans, student loans, and any other recurring debts. Then, divide that total by your gross monthly income (your total income before taxes and other deductions). The resulting number is your debt-to-income ratio.

A DTI ratio of 36% or lower is considered healthy, while higher DTIs may make financing progressively harder to secure. 

Your DTI ratio can serve another purpose: helping you gauge the effects that different mortgage payments may have on your finances. Adjust your possible mortgage payment amount when calculating your DTI to see how it affects your ratio.

A Key Example

Let's say you have $700 in existing monthly debt payments and a gross monthly income of $4,500. Lenders will consider your new mortgage payment when assessing your DTI, so add your potential mortgage payment to your debt amount. If your new mortgage payment is $1,000, then your DTI calculation would be:

1,700 / 4,500 = DTI

1,700 / 4,500 = 0.377

DTI ratio is 37.7%

While you may be able to afford this, you're just over the cusp of a favorable DTI. Reducing your debt or mortgage payment may improve your ability to secure preferable financing.