Debt-to-Income Ratio: A Key Metric for Your Financial Health | BMI Federal Credit Union

If you want to quickly check your financial pulse, your debt-to-income ratio is a key way to do that. Your debt-to-income ratio, or DTI, is an important measure of how much financial strain you’re under. Like it sounds, this ratio compares what you owe to what you earn. It’s a financial benchmark lenders use to establish loan terms and is worth monitoring for long-term financial health.

What is a Debt-to-Income (DTI) Ratio?

A debt-to-income ratio is a percentage that tells you what portion of your income is already dedicated to paying off debt every month. It’s calculated by comparing your monthly debt payments to your gross monthly income. Gross income is your income before taxes and deductions. Your DTI is the primary tool lenders use to assess risk and see your capacity to take on and manage new debt. If your DTI is acceptable (more on that later), you’ll move through to other checks in the process. If it’s not, you could be denied on the spot. A lower DTI can lead to higher chances of loan approval, better interest rates, and potentially larger loan amounts.

Calculating Your Debt-to-Income Ratio

Unlike financial benchmarks that require complicated computations, calculating your debt-to-income ratio is straightforward: take your total monthly debt payments, divided by your gross monthly income, and multiply that number by 100.

DTI = (Total Monthly Debt Payments / Gross Monthly Income) x 100

The hardest part is likely determining your gross monthly income. If you only have one source of income, add up what you’re paid every month before taxes or deductions. If you have other sources of income—as long as they are verifiable and consistent—add in those, too. What qualifies as verifiable and consistent income? Generally, anything that’s documented with pay stubs, tax returns, and W-2s, including:

• Commissions
• Overtime pay
• Alimony
• Child support
• Income from a second job
• Retirement or pension income
• Social Security income

Once you determine your gross income, you’ll need to calculate your total monthly debt payments. Include any recurring debts, such as:

• Mortgage or rent payments
• Minimum credit card payments
• Car loans
• Student loans
• Personal loans
• Child support payments
• Alimony payments

Once you have your gross monthly income and your total monthly debt payments, you’re ready to crunch the numbers. For example: say you have $5,000 in gross monthly income and $2,000 in debt payments. Your DTI calculation is 2,000/5,000 = 0.4, and then multiply 0.4 by 100 to get your DTI of 40%.