Debt-to-Income Ratio (DTI)

In one sentence: The debt-to-income ratio shows what share of a household’s monthly income, before tax, goes to paying debts each month.

$\text{DTI} = \frac{\text{Monthly debt payments}}{\text{Gross monthly income}}$

Read it out loud: “DTI equals monthly debt payments divided by gross monthly income. DTI stands for debt-to-income. Monthly debt payments are the amounts that must be paid each month on loans and cards. Gross monthly income is the income for the month before taxes are taken out. The result is a share, often shown as a percentage.”

Before you start

The ideas and signs this page uses, explained from zero. For powers of ten, Greek letters and other notation in general, see Math basics.

Monthly and gross: A monthly figure covers one month. Gross income is the total before taxes and deductions are taken out. Net pay, also called take-home pay, is what actually reaches the bank account after those deductions.
Percent and decimal shares: A share can be written as a decimal or as a percent. 0.2 is the same as 20%, because percent means per hundred. To change a decimal into a percent, multiply by 100.
Loans, interest and minimum payments: A loan is money borrowed and repaid over time, usually with interest, which is the fee the lender charges for using the money. A minimum payment is the smallest amount a credit card holder must pay each month to keep the account in good standing.
Units that cancel: When a formula has the same unit on top and on the bottom, the unit cancels, like the same item on both sides of a fraction. Dollars per month divided by dollars per month leaves a plain share with no unit.
Approximately equal: The symbol $\approx$ means approximately equal. It is used when a result has been rounded, so $\frac{1700}{3500} \approx 0.4857$ means the exact answer is very close to 0.4857.

What each symbol means

Symbol	Meaning
$\text{DTI}$	The debt-to-income ratio, the result. It is usually shown as a percentage: 0.20 means 20% of gross monthly income goes to debt payments. It has no unit beyond that.
$\text{Monthly debt payments}$	The total each month that the household must pay on its debts, such as a car loan, a student loan, a mortgage and the minimum card payments. Measured in dollars per month.
$\text{Gross monthly income}$	Income for one month before taxes and other deductions are taken out. Measured in dollars per month.

The formula piece by piece

$\text{Monthly debt payments}$: Start with the top of the fraction. It is the sum of every amount that must be paid each month on loans and cards, the money that leaves the household before anything else is bought.
$\text{Gross monthly income}$: This is the bottom of the fraction. It is the household’s whole income for the month, before taxes and deductions. It is the base the payments are compared with.
$\frac{\text{Monthly debt payments}}{\text{Gross monthly income}}$: Divide the payments by the income. The result is the share of each month’s gross income that debts take up.
$\text{DTI} = \frac{\text{Monthly debt payments}}{\text{Gross monthly income}}$: The whole formula in one sentence: the debt-to-income ratio equals monthly debt payments divided by gross monthly income.

What the formula is doing, and why

A loan is a promise to pay a set amount every month. Each new loan adds to the amount that must leave the household each month, so a household with a lot of debt has less room in its budget. The debt-to-income ratio measures that squeeze. It asks: what fraction of the income earned in a month is already committed to paying debts?

Why divide by income? A payment of 1000 dollars a month is a heavy load for a household earning 2000 dollars a month, and a light one for a household earning 10000 dollars a month. Dividing by income turns the payment into a share, which can be compared across households. A small share leaves room for food, bills and savings. A large share leaves little room.

Why gross income? The ratio uses income before tax, because that is the usual starting figure in lending. Taxes and deductions vary from person to person, so the gross figure gives a common starting point. Because it is measured before tax, the ratio looks lower than a ratio based on take-home pay would.

Why the answer is a guide, not a rule. A ratio is a snapshot of the monthly budget. It does not show savings, how long the loans last or how steady the income is. Each lender sets its own limits and looks at other facts too, such as credit history. Use the ratio as one clue, not as a pass or fail test.

Which payments count. Everyday bills such as groceries, utilities and phone plans are usually left out of the top line. The top line covers the regular debt payments that a lender would see, plus the payment on any new loan being considered.

An everyday picture

Think of a monthly paycheck as a bucket of water. Each debt payment is a hole in the bucket that drains water out before you can use it for anything else. The debt-to-income ratio is the share of the bucket that drains away every month. A small leak leaves plenty for other needs, while a big leak leaves little to spare.

Worked example: How much of the Ortiz household’s income goes to debt?

The Ortiz household is a made-up family. Each month they must pay 400 dollars on a car loan, 200 dollars on a student loan and 100 dollars as the minimum on a credit card, so their monthly debt payments total 700 dollars. Their gross monthly income, before taxes, is 3500 dollars. We want the DTI. Then we ask what happens if they take on a new loan with a payment of 1000 dollars a month.

Add up the monthly debt payments. Every debt payment that must be paid each month belongs on the top of the fraction, so we add the car loan, the student loan and the card minimum: $400 + 200 + 100 = 700\ \text{dollars per month}$ . All three are due every month, so all three count.
Write down the gross monthly income. The gross figure is the 3500 dollars earned in a month before taxes, so it goes on the bottom of the fraction. We use the figure before tax because that is the usual starting point for this ratio.
Divide the debt payments by the income. Using the formula, $\text{DTI} = \frac{700\ \text{dollars per month}}{3500\ \text{dollars per month}} = 0.2$ . The per-month units cancel, so the result is a plain share.
Turn the share into a percentage. Percent means per hundred, so we multiply by 100: $0.2 \times 100 = 20\%$ . So 20% of the household’s gross income goes to debt payments each month, and the other 80% covers taxes, food and everything else.
Add the new loan’s payment. A new payment of 1000 dollars a month is added to the top of the fraction: $700 + 1000 = 1700\ \text{dollars per month}$ . The bottom stays at 3500 dollars per month, because the household’s income has not changed.
Divide again with the larger total. $\text{DTI} = \frac{1700}{3500} \approx 0.4857$ , which is about 48.6%. Almost half of the gross income would then go to debt payments, leaving much less room in the monthly budget.

Answer: The Ortiz household’s DTI is 20% today. If a new payment of 1000 dollars a month were added, the ratio would rise to about 48.6%, which leaves much less of each month’s income for other needs. Each lender sets its own limits, so the same number can be judged differently by different lenders.

The numbers in this example are recomputed by script every time the site is built.

Common mistakes

Using take-home pay on the bottom of the fraction. The ratio is normally measured on gross income, before taxes, so using net pay gives a larger and different number.
Leaving out a debt you already have. Every regular monthly payment on a loan or card that a lender would see belongs on the top line.
Putting groceries, utilities or other everyday bills on the top line. They are part of the budget, but they are usually not counted as debt payments in this ratio.
Treating one ratio as a verdict. Each lender sets its own limits and also looks at credit history, savings and other facts.
Mixing a yearly figure with a monthly one. Both the payments and the income must cover the same month, or the share will be wrong by a factor of twelve.

Where you will meet it

Mortgage applications, where a lender checks how much of the borrower’s gross income is already committed to debt.
Car and personal loan approvals, where the same share helps the lender judge whether a new payment is affordable.
Personal budgeting, where a household tracks its ratio before it takes on a new loan.
Financial counselling, where counsellors use the ratio to explain how much debt a household is carrying compared with its income.

Questions people ask

Is the ratio based on gross income or take-home pay?

Lenders usually use gross income, the amount before taxes and deductions. Take-home pay is a useful figure for a personal budget, but it gives a different ratio, so do not mix the two when comparing with a lender’s answer.

Do all debts count?

Most regular debt payments that a lender can see do count, such as loans, mortgages and minimum card payments. Ordinary living costs such as food and utilities usually do not. The exact list depends on the lender and on the type of loan.

What if a household has no debt?

Then the top of the fraction is zero, so the ratio is zero. A zero ratio means none of the income is committed to debt payments, but it says nothing about savings or about how well the household could handle an emergency.

Loan Payment: The loan payment formula gives the fixed amount you pay each month so that a loan is fully repaid, interest included, by the last payment.
Compound Interest: Compound interest says a savings balance grows faster over time, because each round of interest is added to the balance and then earns interest of its own.
Effective Annual Rate: The effective annual rate says what a stated yearly rate really adds up to over a year, once interest is added more than once and earns interest of its own.