Most people want more money coming in and less money going out. If you owe too much, a sudden drop in your income can cause big problems. Each month, you have income (like your paycheck or side job) and expenses (like bills, groceries, and rent or mortgage). Debtsโsuch as credit card balances or student loansโadd more to what you owe each month.
What is the Debt-to-Income Ratio?
Your Debt-to-Income Ratio, or DTI, compares what you owe each month to what you make before taxes. It looks like this:
DTI = (Total of your monthly debt payments/your gross monthly income) x 100
Example:
- Gross monthly income: $5,000
- Monthly debt payments: $1,850 (including rent or mortgage and any loan payments)
- DTI = (1,850 รท 5,000) ร 100 = 37%
Check out this handy calculator to calculate your current DTI.
Why DTI Matters
A lower DTI often means youโre in a safer spot financially. If your DTI is high, you could struggle to pay bills if you lose income or face big expenses (like car repairs or medical costs).
DTI and Your Credit Risk
DTI is typically used within the lending industry. If you apply for a loan, a lender will look at your DTI as an important measure of risk. If you have a high DTI, you will be regarded as more likely to default on a loan. If you apply for a mortgage, your DTI will be calculated as part of the underwriting process. Usually, 43% is the highest DTI you can have and likely receive a Qualified Mortgage. (A Qualified Mortgage is a preferred type of mortgage because it comes with more protections for the borrower, e.g., limits on fees.)
What Counts as a Good DTI?
Experts often say a DTI under 20% is very good. If your DTI is above 40%, you might be stretched thin. A lower DTI can help you feel more secure.
How DTI Affects Your Life
Lenders may look at your DTI when you apply for a loan, such as a mortgage. If your DTI is lower, you might have an easier time getting approved.
Reducing Your DTI
Pay Down Debts: Focus on high-interest debt first.
Refinance When It Makes Sense: For example, refinancing student loans might help you lower your monthly payments.
Track Your Budget: Watching your spending can free up money to put toward debt.
Considering Student Loan Refinancing
Refinancing student loans can lower your monthly payment, which may help bring down your DTI. It can also free up extra cash for other goals.
ELFI can help you figure out your DTI and see if you might potentially benefit from refinancing your student loans*. Taking steps to lower your DTI can reduce stress and give you more control over your finances.
*This content is for informational purposes only and does not constitute financial advice.
