Your debt-to-income ratio (DTI) is an important factor in the borrowing process and shows lenders your ability to pay back a loan.
What is debt-to-income ratio?
Your debt-to-income ratio refers to how much debt you have in relation to your income. This is an important consideration because when a lender approves a loan, they want to make sure you have enough income to pay back the loan.
If you have a lot of debt that takes up a good chunk of your income, it could be a warning sign.
How is debt-to-income ratio calculated?
According to the Consumer Financial Protection Bureau (CFPB), “Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.”
Your gross income is the amount of money you earn before any taxes or deductions are withheld. Your debt payments refer to the amount of money you spend each month on your loans.
Let’s say you earn $2,500 as your gross income. Each month you spend $200 on an auto loan, $250 on student loans, and $300 on credit cards. That means you’re spending $750 each month to manage your debt payments.
To figure out your debt-to-income ratio, you’d divide your debt payments by your gross income:
$750 ÷ $2,500 = .3
Take that number and…