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What is Debt-to-Income Ratio?

What is Debt-to-Income Ratio?

September 30, 2022

Before we get into how to calculate debt-to-income ratio or even why it’s important, it’s a good idea to get a basic understanding of what it is. According to the Consumer Financial Protection Bureau (CFPB) debt-to-income (DTI) ratio “is all your monthly debt payments divided by your gross monthly income,” this percentage is used by lenders to determine how much of a risk you are as a borrower.

Why is Debt-to-Income Ratio Important?

We’ve answered the question, “What is debt-to-income ratio,” but why is it important? Your debt to income ratio informs you and lenders whether you have a good balance between your debt and your income. This means you're paying a smaller portion towards debts compared to your total income. Generally speaking, the lower the percentage, the better the situation you are in as a borrower in Naperville or Chicago. Depending on the lender and the loan products, different percentages can get you what you need. Explore how to calculate debt-to-income ratio below. 

How to Calculate Debt-to-Income Ratio

In order to calculate your debt-to-income ratio, you should add up the total of your monthly debt payments and divide them by your gross (the amount earned before taxes and deductions) monthly income. Total monthly payments include:

  • Monthly rent or house payment
  • Monthly alimony or child support payments
  • Student, auto, and other monthly loan payments
  • Credit card monthly payments (use the minimum payment)
  • Other debt

It does not include:

  • Groceries
  • Utilities
  • Gas
  • Or Taxes

For example, if you pay $2500 a month for your mortgage and another $300 a month for an auto loan, plus $200 a month for the rest of your debts, your monthly debt payments are $3,000. ($2500 + $300 + $200 = $3,000.) If your gross monthly income is $9,000, then your debt-to-income ratio is 33 percent. ($3,000 is 33% of $9,000.)

Balance Your Debt-to-Income Ratio with the Help of IntentGen! 

Typically, borrowers who have low debt-to-income ratios are better at managing their debts, and because of this, banks and financial credit providers want to see low DTI ratios before issuing loans to a potential borrower. If you need help managing your debt or setting yourself up for a better future, IntentGen can aid you in taking the right financial steps for you and your family in Arlington Heights.