The Money Coach
  • About
    • Meet Lynnette
    • Media Kit
  • Contact
  • Subscribe
  • Submit an Article
  • Books
  • Categories
  • Coaching
  • Book Lynnette
  • Money Coach University™
No Result
View All Result
The Money Coach
  • About
    • Meet Lynnette
    • Media Kit
  • Contact
  • Subscribe
  • Submit an Article
No Result
View All Result
The Money Coach
No Result
View All Result

DTI or Debt-to-Income Ratio Explained w/Video

Lynnette Khalfani-Cox, The Money Coach by Lynnette Khalfani-Cox, The Money Coach
in Credit Scores
Reading Time: 3 mins read
DTI Explained

Concept image of Business Acronym DTI as DEBT TO INCOME written over road marking yellow paint line.

75
SHARES
1.3k
VIEWS
Share on FacebookShare on TwitterShare on LinkedIn

If you’re in the market for a loan, chances are that lenders are going to assess something called your “DTI” – also known as your Debt-to-Income ratio. What Exactly is a DTI? And, how can you improve it in order to get that loan that you want?

How DTI is Calculated

First of all, you need to know which debts are taken into account when a lender is going to approve or reject you for a loan. The debts are typically anything that’s included on your credit report that you have 9 – 12 months (or more) to continue paying off.

So, let’s say you have credit card debt that is still remaining; that’s going to be counted in your DTI. Or if you have an auto loan and there’s still a year or more to pay it off —that’s also going to be counted in your Debt-To-Income ratio.

What about Student Loan debt? Yes, if you haven’t paid off those college loans, that will also be included in your DTI.

Lenders take a look at all of your monthly payments from a credit standpoint, but not the other stuff like your utilities and/or child support payments. Those don’t factor into your debt-to-income ratio. It’s only those debts that are reflected as traditional credit obligations on your credit reports.

So, lenders will add up all of those on a monthly basis and calculate your monthly minimum debt payments. Then, lenders will take a look at your income, specifically, your net in net income or take-home pay.

Types of Income Included in Your Debt-to-Income Ratio

On the income side, lenders will look at your paycheck and any other sources of income that you have.

Maybe you actually receive child support payments. While child support payments you make don’t get factored into DTI, child support payments you get can actually be included in your income.

You might also have commissions in addition to your wages. You could have rental income (Note: Typically, you have to have rental income for two or more years for a bank to assess that and use that in your income calculation).

An Example of How Lenders Calculate Your DTI

So lenders take a look at all of your sources of income and they total it up. If it is annual figure, they divide by 12 and that’s how they come up with a monthly figure.

They ultimately compare the debts that you’ve shown in comparison to your income.

Let’s say your debts were $3,000/month and let’s say your income is $9,000/month. This means that your DTI is 33% because your debts represent 1/3 of the income that you’re bringing in.

So, when you’re trying to figure out your own DTI, you need to understand what is going to be counted and assessed.

Front-End DTI vs. Back-End DTI

In the case of applying for a mortgage, lenders will look for something called your “front-end DTI” as well as your “back-end DTI”.

Your front-end debt-to-income ratio is a comparison of your housing costs compared to your income. Your back-end DTI refers to all your recurring bills, plus your housing expenses.

They’ll add in everything, like your mortgage payment along with those other credit obligations, in order to compute your back-end DTI.

What is a good DTI?

When you need a loan, you should ask potential lenders what is their limit, or policy, in terms of the highest level of DTI that you can show and still qualify for the mortgage or loan in question.

Typically, most lenders are somewhere in the 45% figure in terms of your overall DTI. They’re going to look at your credit payments, your housing payments, your student loan payments, your auto loan, and they don’t want that figure to be more than 45% of your overall monthly income.

Some lenders will have more strict guidelines; others more liberal guidelines. So you may find some strict lenders that won’t approve a loan if you DTI is higher than 43%, whereas other lenders will bump it up to a 50% Debt-To-Income ratio in order to be more liberal in their underwriting standards.

But again, it is up to you as a consumer to first ask ahead of time – before applying for a loan – so that you know what you need to do in order to qualify, and hopefully get the best loan rates and terms.

Maybe you need to pay off some of those debts before you actually apply for the loan.

If so, at least you now understand what a debt-to-income ratio is and can begin to increase your chances of success when the time comes to fill out your loan application.

Tags: debt-to-income ratios
Previous Post

7 Reasons to Save More Money or Boost Your Emergency Fund

Next Post

Mismanaging Your Credit

Related Posts

photo of toy house and set of keys to illustrate mortgage rating and credit score

Credit Scores Explained: How They Affect Your Mortgage Rating

by AskTheMoneyCoach

Learn the basics of credit scores, how they impact your mortgage rating, and tips to improve your financial standing in the lending world.

credit score drops

What to Do If Your Credit Score Suddenly Drops Unexpectedly

by Lynnette Khalfani-Cox, The Money Coach

Need a quick refresher about how your credit score works? Due to inflation, many consumers are being forced to rely on their credit cards to make ends meet. As a result, many consumers have seen their credit scores go down as their balances go up. Here are 3 articles that...

rent payments to boost credit score

How to Use Rent Payments to Boost Your Credit Score

by Lynnette Khalfani-Cox, The Money Coach

This post originally appeared on Sisters from AARPBlack folks often face a host of credit challenges stemming from lower incomes, discrimination, a lack of knowledge about credit scoring and more. But one additional factor — the low rate of Black homeownership in America — has also meant diminished credit scores....

protect your credit score

How to Protect Your Credit Score After Job Loss 

by Lynnette Khalfani-Cox, The Money Coach

A lack of income makes it hard to cover your expenses, which can cause your credit score to fall. But there are ways to preserve it, even if you are out of work. Here are four tips for maintaining your credit score if you have lost your job.

Best Way to Check Your Credit Score Using Apps

The Best Way to Check Your Credit Score Using These 4 Apps

by Guest Blogger

Did you know that on a $21,788 auto loan, if you have an excellent credit score (740 – 749), you can pay 311% less in interest compared to an individual with a fair credit score (580 – 669)? 311% less! Your credit score determines whether you qualify for things like...

4 Summertime Risks to Your Credit Score

by Lynnette Khalfani-Cox, The Money Coach

Just because summertime is here and you might be taking it easy, that doesn’t mean you should let your guard down when it comes to your finances. In fact, during the summer season, you should be aware of a number of potential threats that can hurt your credit rating. Some...

credit score drop

What to Do If Your Credit Score Drops Unexpectedly

by Lynnette Khalfani-Cox, The Money Coach

  Having your credit score fall unexpectedly can be as bad as losing a significant amount of money. With a lower score, your opportunities for low-interest loans, lower insurance premiums, and more affordable mortgages may be out of your reach. What’s worse is that these fluctuations may come from out...

Load More

Popular Posts

  • Car repair

    What to Do If You Can’t Afford a Car Repair Bill

    1526 shares
    Share 610 Tweet 382
  • What to Do if Your Spouse Stole Money From You

    1309 shares
    Share 524 Tweet 327
  • What to Do If You Can’t Afford to Leave Your Spouse

    1273 shares
    Share 509 Tweet 318
  • Here’s Why I Pay My Kids For Good Grades (And Maybe You Should Too)

    1129 shares
    Share 451 Tweet 282
  • What Do All Those Strange Codes In My Credit Report Mean?

    899 shares
    Share 360 Tweet 225
  • Which Credit Report is More Important: Equifax, Experian or TransUnion?

    866 shares
    Share 346 Tweet 217
  • Do This Now If Your Wages Were Not Reported

    853 shares
    Share 341 Tweet 213

Categories

  • Bankruptcy
  • Budgeting
  • Building Wealth
  • Careers
  • Couples and Money
  • Coupons and Deals
  • Covid-19
  • Covid-19 Video
  • Credit Cards
  • Credit Reports
  • Credit Scores
  • Crypto
  • Debt
  • Entrepreneurship
  • Family Finances
  • Featured
  • Identity Theft
  • Insurance
  • Investing
  • Loans
  • Paying for College
  • Personal Finance
  • Press Releases
  • Real Estate
  • Retirement
  • Saving Money
  • Scams
  • Student Loans
  • Taxes
  • Uncategorized

All information on this blog is for educational purposes only. Lynnette Khalfani-Cox, The Money Coach, is not a certified financial planner, registered investment adviser, or attorney. If you need specialty financial, investment or legal advice, please consult the appropriate professional. Advertising Disclosure: This site may accept advertising, affiliate payments or other forms of compensation from companies mentioned in articles. This compensation may impact how and where products and companies appear on this site. AskTheMoneyCoach™ and Lynnette Khalfani-Cox, The Money Coach® are trademarks of TheMoneyCoach.net, LLC.

©2009-2023 TheMoneyCoach.net, LLC. All Rights Reserved.

RSS / Sitemap /Submit an Article / Privacy Policy / LynnetteKhalfaniCox.com

No Result
View All Result
  • Books
  • Categories
  • Contact Lynnette
  • Get Coaching
  • Book Lynnette
  • Money Coach University™
  • Home
  • Subscribe to Newsletter
  • Submit an Article

©2009-2023 TheMoneyCoach.net, LLC. All Rights Reserved.

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In

Add New Playlist