3 Simple Steps to Calculate Your Debt-to-Income Ratio & Credit Secrets Most People Will Never Know

The second leg of my World-Famous “Three-Legged Stool” Analogy of “How Credit Works” is your “debt-to-income ratio”.

“DTI” as they call in the mortgage industry.

If you’ve ever gotten a mortgage or refinanced your home, then you know the mortgage folks are very interested in your debt-to-income ratio.

Remember, debt-to-income ratio is the amount of money that you’re obligated to pay each month towards your debt vs. your monthly income, but what’s important is how the creditors see it…

To calculate your debt-to-income ratio, just follow these three simple steps:

Step 1. Add up your total monthly gross income.

That could include your income from an employer, bonuses, tips, commissions, government benefits, child support, alimony and interest and dividends accruals.

Step 2. Add up your total monthly debt payments.

Needless to say, that includes your mortgage payments, your car payments and any minimum payments you make on your credit cards. It does NOT include your taxes or utilities.

Step 3. Divide your debt payments by your monthly income.

Here’s the formula:

Total Monthly Debt Payments ÷ Monthly Gross Income = Debt-to-Income Ratio

Sample debt-to-income table based on a person earning a gross income of $66,000 per year:

Step 1. Add up your total monthly gross income.

Monthly Income (Gross)* = $5,500

* Monthly Gross Income: Income before taxes and other deductions

Step 2. Add up your total monthly debt payments.

Debt / Monthly Payments:

Mortgage Loan $1,300/mo

Auto Loan $395/mo

Credit Card #1 $60/mo

Credit Card #2 $45/mo

Credit Card #3 $75/mo

Total Monthly Debt Payments = $1,875

Step 3. Divide your debt payments by your monthly income.

$1,875 ÷ $5,500 = .34 (34%)

This person has a debt-to-income ratio of 34 percent.

According to most lenders, a debt-to-income ratio of 36 percent or less is what you should aim for. It’s an indication to lenders that you have disciplined spending habits and are “credit worthy”.

Here are the other percentage categories most lenders recognize:

37 to 42 percent: Your debts appear manageable, but are more likely to get out of control. Start paying them down now. You may still be able to obtain credit cards, but acquiring loans may prove difficult and will cost more.

43 to 49 percent: Your debt ratio is too high. Financial difficulties are likely unless you take immediate action. You may still obtain financing, but at much higher rates, costing you far more money over time.

50 percent or more: Seek professional help immediately to reduce debt before it’s too late.

Important: Recalculate your ratio every year or whenever you face a significant life event, such as divorce, job change, etc.

So now you know if you’re on sound financial footing or if your ship is likely to sink. (You probably had a good guess anyway, but the Debt-to-Income Ratio confirms it.)

Another way to look at this is, how much money do you have available to pay for new debt? How much more in monthly minimum payments can you afford? Lenders still want to lend you as much as they can within a tolerable risk, but they charge you much more interest to do it.

If you have past due amounts, then this is for you:

If you’re reading this, it’s very likely you’re experiencing some kind of financial hardship; whether it’s medical issues, unexpected bills, loss of a job or reduced income, even poor money management. These are the most common things getting people into deep trouble.

Here’s a “secret” you need to know about how being past-due may be affecting your debt-to-income ratio:

Say you fell behind a couple of months and there’s a past due amount listed on your credit card account statement. When computers scan your credit report, they’re looking for the current amount due, this goes up to include all past due amounts and “lop-sides” your debt-to-income ratio, making it go through the ceiling.

Often when people lose a job or have a reduction in income, they fall behind on payments… and those stack up as past due amounts… and this exponentially worsens their debt-to-income ratio. (Quadruple whammy – Ouch!)

If you’re in a hardship situation like this, then it’s time to “do something” to eliminate your debt, ASAP!

Your debt-to-income ratio reveals your financial soundness. Monitoring your ratio also helps to avoid “creeping indebtedness.” If you’re seeking to obtain a loan for a home, vehicle or business, lenders look at this ratio when they’re considering extending a line of credit.

A Credit “Secret” Most People Will Never Know:



You can have a perfect payment history (never missing a single payment), but if your debt-to-income ratio is too high then you’re effectively crippled when it comes to “credit worthiness” (your ability to get a loan). You’re not credit “worthy”, even though you may have a good credit “rating”.

So that’s your “debt-to-income ratio” – a very important factor of your credit.

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