It’s the amount of debt you have compared to your income. Lenders use your debt-to-income ratio to decide whether you’ll be likely to repay your debts to them.
To figure out what your debt-to-income ratio is, add up your ongoing monthly bills. Minimum credit card payments, rent, auto loans, and student loans. Only consider your minimum payments, not the total amount you owe. Add them all up and divide it by your gross monthly income (before taxes and other deductions). This is your debt-to-income ratio and it’s written as a percentage.
As example, if you had a $1,100 monthly car payment, $300 minimum card payment, and $300 minimum student debt payment, your total monthly bills would be $1,700. If your monthly income is $5,000, your DTI ratio would be 1,700/5,000 = 0.34. 0.34 x 100 = 34. Your DTI would be a very healthy 34%.
Your lender’s biggest concern is whether you can pay back the loan. Your DTI score is just one of the calculations they use to help decide. They’ll also look at your FICO score, employment history, income, assets, and more.
At a minimum, they want to see your ratio under 50%. It’s ideal to have yours closer to 35%, but ranges between the two are acceptable.
Average debt per American
It’s difficult to tell what an average DTI ratio is, but we can say what the average amount of debt is. A 2021 CNBC report calculated the average American has $90,460 in debt. That includes their credit cards, personal loans, mortgages, and student debt. The higher an individual’s income, the higher their debt (and the easier it is for them to pay off).
Age 18 to 23: $9,593
Age 24 to 39: $78,396
Age 40 to 55: $135,841
Age 56 to 74: $96,984
Age 75+: $40,925
Reducing your DTI
There are just two ways to do it. Reduce your monthly expenditures or increase your monthly income. Both options will take time and effort but pay off in the long run.
Rather than deciding on your own if your DTI is too high, consider talking to your home lender to go over it together. Local home lenders, like Mann Mortgage, will review your DTI and work with you and your unique financial decision to find the right loan.