To get a loan, you better prove you might pay for it.
That might seem a bit counterintuitive.
If I could pay for it, why would I be borrowing in the first place?
Lenders arent in the business of giving away money to just anyone.
They want proof youre a responsible person who has the ability topay back your debts.
One way to do that is by checking your debt-to-income ratio, or DTI.
Heard of These Credit Card Debt Tips?
But millions of Americans overlookthese easy tipsthat could help them manage credit card debt even more wisely.
Read moreto boost your credit knowledge and keep your credit score in check.
Thats the ratio that compares your monthly debt payments to your monthly income.
Wondering what your DTI is and whats a good score?
What Is Debt to Income Ratio?
This number is important because it informs lenders on your ability to repay a loan.
Your DTI is an important piece of the puzzle when it comes to your financial health.
But what goes into your monthly debt?
And how about your monthly pay?
That DTI ratio is commonly known asconsumer DTI.
But the overall DTI the one lenders prefer uses your gross monthly pay (your pre-tax pay).
OK, so the bottom number (aka divisor) is easy enough.
The top half of the ratio (aka numerator) is a little trickier.
Your overall DTI ratio does not include monthly expenses such as groceries, gas and utilities.
The golden rule is only to include things that show up on the credit report, McClary said.
If youre calculating your DTI strictly for personal planning, you should include rent as part of your expenses.
But will lenders include it?
That depends, according to Brent Weiss, CFP and chief evangelist ofFacet Wealth.
But the lender will still want to know what your monthly expenses will look like going forward.
We Dare You to Take Control of Your Debt
Up for a debt challenge?
In 10 days,these 10 practical stepscould help you get back on the right financial track.
For example:
Jane wants to buy a house and applies for a mortgage.
So you know how to calculate debt to income ratio and why its important.
Now for the main question: What is a good debt to income ratio?
Keep in mind, these are all rules of thumb.
So that may look a little bit riskier than somebody driving 10 miles below the speed limit or 15.
But I cant pin down a specific number below 43 and say, Thats the sweet spot.
Is Your Paycheck Not Going As Far As It Used To?
We get it.Everythingis more expensive than it used to be, but your paycheck hasnt kept up.
When money is tight,these resourceswill help nearly everyone.
Its importance in terms of loan qualification should just be a bonus, according to McClary.
Thats one less thing you have to worry about, he said.
Tiffany Wendeln Connors is a former staff writer/editor at The Penny Hoarder.
FAQs about Debt to Income Ratio
Unlike other financial health markers (i.e.
credit utilization score), your debt to income ratio technically cant reach a number thats too low.
For a front-end DTI (for housing expenses), 28% and under is considered good.
For consumer debt to income ratio, you should shoot for around 35%.
Anything higher than 43% for a DTI starts to look risky to lenders.
Numbers above 60% are considered high.
If your debts begin to exceed your gross income, your DTI will surpass 100%.
To calculate debt to income ratio, divide your monthly debts by your monthly income.
