Your debt-to-income ratio, or DTI, compares your monthly income to your monthly debt. People with high debt relative to their income will have a higher DTI and vice versa. This is an important number because it shows borrowers your bandwidth to assume more debt. The higher your DTI, the harder it will be to get a mortgage, much less a good interest rate. Many lenders won’t consider a borrower with a DTI above 43 percent.
For borrowers, it’s a good idea to pay off as much existing debt as possible to qualify for a mortgage as well as to make room for a mortgage payment. By paying off debt, you’ll be in a better position to manage your monthly costs and open up resources in case you run into emergency expenses.
Monthly expenses are not counted in your DTI, only debt obligations. So you don’t have to include things utilities, gym memberships or health insurance.
Here's how to figure out your DTI:
Add up your total monthly debt and divide it by your gross monthly income, which is how much you brought home before taxes and deductions.
Add up your monthly: $1200 (rent) + $200 (car loan) + $150 (student loan) + $85 (credit card payments) = TOTAL: $1,635. Now, divide your debt ($1,635) by your gross monthly income ($4,000). 1,635 ÷ 4,000 = .40875. By rounding up, your DTI is 41 percent. If you get rid of the $85 monthly credit card payment, for example, your DTI drops to 39 percent.