Understanding Credit

Knowing your debt-to-income ratio (DTI) can help you get a better idea of your overall financial picture. Which begs the question, what is a good debt-to-income ratio? Is there a magic number that can help you definitively say, this is a good, or not so good, debt-to-income ratio?

The truth is, the answer varies. Depending on who you talk to and why you’re measuring your DTI, a good debt-to-income ratio may not look the same to everyone.

But there is hope: The Consumer Financial Protection Bureau (CFPB) and other experts can agree on three general thresholds to consider.

Debt-to-Income Ratio Breakdown

Tier 1 — 36% or less: If you have a DTI of 36% or less, you should feel good about how much of your income is going toward paying down your debt. You’re likely in a healthy financial position and you may be a good candidate for new credit.

Tier 2 — Less than 43%: If you have a DTI less than 43%, you are likely in a good place for now, especially if you have a mortgage. If you are seeking a mortgage, lenders will often require applicants have a DTI less than 43%. You’re likely in a comfortable position, but if you are seeking a mortgage, you may want to consider ways to reduce your debt.

Tier 3 —43% or more: If your DTI is higher than 43%, you’re probably feeling a little strapped right now with your monthly payments. The CFPB says that at this level, lenders may assume people have more debt than they can cover, and may not approve you for new credit. The good news is that there may be ways for you to pay down debt faster and take action to reduce your debt.

Calculate your own DTI right now with our debt-to-income ratio calculator.

If you’re applying for a mortgage, there are two types of debt-to-income ratios lenders use.

If you’re in the market for a mortgage, you should also consider front and back end debt-to-income ratios. When you’re applying for a mortgage, lenders will likely look at debt-to-income ratio in two ways.

  • The front-end ratio is used to determine if you can repay your mortgage. A front-end DTI ratio includes your projected monthly mortgage payment, insurance, property taxes, homeowners association fees, but does not include other monthly expenses like student loans or credit card debt. You should only have to worry about your front-end ratio when you’re applying for a mortgage.
  • The back-end ratio is an overall measure of debt compared to your income. It includes all of your monthly debts, like credit cards and student loan debt, in addition to any household payments. As such, this number tends to be higher than front-end ratios, but it is the more common measure of your DTI.

What A Good Debt-to-Income Ratio Could Look Like

What do these calculations look like in practice? Here’s a few examples of debt-to-income ratio in the wild.

  • Your gross monthly income is $4,500. Your monthly housing costs, credit card debt, auto loan debt and personal loan debt equals $2,000. Your (back-end) DTI is 44%, which means you may not qualify under certain lenders for a mortgage. Elsewhere if you’re applying for other types of credit, you may have to demonstrate your ability to repay other ways.
  • Your gross monthly income is $2,000. Your credit card debt and auto loan debt equals $650 each month. Your DTI equals 32.5%, which means you’re probably in a good financial position compared to your income.
  • Your gross monthly income is $3,500 and you’re applying for a mortgage in a few months. Your monthly credit card debt and auto loan debt equals $1,000. Your back end DTI is 28%, and you’re likely in a good place to qualify for a mortgage.

Knowing your debt-to-income ratio can help eliminate surprises when you apply for new credit. It can help you paint the full picture of your finances, which can help you take action on your financial goals.

The Bottom Line on Debt-to-Income Ratio

Your DTI is just one measure of your overall financial health. You could have a not-so-good DTI and still be in a comfortable financial position, and vice versa. It’s about taking the time to really evaluate your financial situation compared to your goals.


May 04, 2019


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