To get your DTI ratio under better control, focus on paying down debt with these four tips. My credit rating is still high. I am thinking about a debt consolidation loan. Will that adversely affect my credit rating? Read more. Debt-To-Income Ratio Calculator. Lenders, including issuers of mortgages, use it as a way to measure your ability to manage the payments you make each month and repay the money you have borrowed. A low debt-to-income ratio demonstrates a good balance between debt and income.
In general, the lower the percentage, the better the chance you will be able to get the loan or line of credit you want. On the contrary, a high debt-to-income ratio signals that you may have too much debt for the income you have, and lenders view this as a signal that you would be unable to take on any additional obligations. To calculate your debt-to-income ratio, add up your total recurring monthly obligations such as mortgage, student loans, auto loans, child support, and credit card payments , and divide by your gross monthly income the amount you earn each month before taxes and other deductions are taken out.
Your monthly debt payments would be as follows:. When you apply for a mortgage, the lender will consider your finances , including your credit history, monthly gross income and how much money you have for a down payment. To figure out how much you can afford for a house, the lender will look at your debt-to-income ratio. Expressed as a percentage, a debt-to-income ratio is calculated by dividing total recurring monthly debt by monthly gross income. Above that, the lender will likely deny the loan application because your monthly expenses for housing and various debts are too high as compared to your income.
Your debt-to-income ratio does not directly affect your credit score. This is because the credit agencies do not know how much money you earn, so they are not able to make the calculation.
The credit agencies do, however, look at your credit utilization ratio or debt-to-credit ratio, which compares all your credit card account balances to the total amount of credit that is, the sum of all the credit limits on your cards you have available.
In general, the more a person owes relative to their credit limit—how close to maxing out the cards—the lower the credit score will be. Basically, there are two ways to lower your debt-to-income ratio:. Of course, you can also use a combination of the two. The lower the DTI; the less risky you are to lenders. For more information, see Understand what your ratio means.
Get Started. This calculator is for educational purposes only and is not a denial or approval of credit. When you apply for credit, your lender may calculate your debt-to-income DTI ratio based on verified income and debt amounts, and the result may differ from the one shown here.
You do not need to share alimony, child support, or separate maintenance income unless you want it considered when calculating your result. If you receive income that is nontaxable, it may be upwardly adjusted to account for the nontaxable status. Personal loan providers generally allow higher DTIs than mortgage lenders. To calculate your DTI, enter the payments you owe, such as rent or mortgage, student loan and auto loan payments, credit card minimums and other regular payments.
Then, adjust the gross monthly income slider. Lenders look at debt-to-income ratios because research shows borrowers with high DTIs have more trouble making their payments. Each lender sets its own debt-to-income ratio requirement. Not all creditors, such as personal loan providers, publish a minimum debt-to-income ratio, but generally it will be more lenient than for, say, a mortgage.
Your debt-to-income ratio does not affect your credit scores ; credit-reporting agencies may know your income but do not include it in their calculations. Lower is better. To reduce your debt-to-income ratio, you need to either make more money or reduce the monthly payments you owe.
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