Everything you wanted to know about Debt to Income Ratio

Your debt to income ratio plays a very important role in your overall financial health. It is this ratio that you need to know before you borrow money. It also helps you in determining how comfortable you are with your current debt.

Your DTI percentage is calculated by dividing your total recurring monthly debt by your monthly gross income. The DTI ratio helps a lender in knowing your capacity to repay the loan amount. It is particularly a case for your mortgage lender, who looks after this number before giving you a loan.

How to calculate DTI

Your DTI compares how much you owe with how much you earn every month. It is the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt. 

[Monthly Debt/Monthly Gross Income]*100 = DTI

Gross or Net Income: Many of you might be thinking why not to take net income which is more conservative instead of gross income while calculating DTI. This is because of better comparability and stability. Gross incomes provide better comparison across different people as they might have different payroll deductions and hence net income may be different.

How to interpret DTI

The thumb rule while interpreting DTI is lowers the better.