The debt-to-borrower ratio, more widely recognized as the debt-to-income (DTI) ratio, is a key financial metric that lenders use to assess your ability to manage monthly debt obligations. It helps them determine whether you can afford additional credit by comparing your monthly debt payments to your gross income.
How Is the Debt-to-Borrower Ratio Calculated?
Calculating your DTI ratio is straightforward: divide your total minimum monthly debt payments by your gross monthly income and multiply by 100 to get a percentage.
- Total Monthly Debt Payments: Include recurring obligations such as rent or mortgage, car loans, student loans, credit card minimum payments, personal loans, and any legally required payments like alimony or child support.
- Gross Monthly Income: Use your total income before taxes and deductions, including salary, wages, bonuses, freelance income, and any other regular income sources.
Everyday expenses like groceries, utilities, and phone bills are excluded from this calculation.
Example
Consider Sarah, who earns $5,000 monthly before taxes and has the following monthly debts: rent ($1,500), car payment ($350), student loan ($250), and credit cards ($100), totaling $2,200. Her DTI is ($2,200 ÷ $5,000) × 100 = 44%.
Why Do Lenders Care About Your DTI?
Lenders view the DTI ratio as an indicator of financial risk. A lower DTI suggests you have enough income to handle additional debt, increasing your chances of loan approval with better terms. Conversely, a high DTI signals limited disposable income, making you a higher risk for new credit.
According to the Consumer Financial Protection Bureau (CFPB), a DTI of 43% is the general cap for a Qualified Mortgage, though some loan programs allow higher ratios under specific conditions.
What Is a Good DTI Ratio?
- 35% or less: Strong financial health; lenders see you as low risk.
- 36% to 42%: Acceptable range; most loans possible but rates may vary.
- 43% to 49%: High DTI; loan options narrow, higher risk.
- 50% or more: Very high; difficult to get loan approval.
Tips to Improve Your Debt-to-Borrower Ratio
- Reduce monthly debts by paying down balances, especially high-interest or small debts.
- Increase income through raises, side jobs, or additional income streams.
- Avoid new debt before applying for major loans.
Related Terms
For further reading, consider related topics such as Debt-to-Income Ratio, Loan-to-Income Ratio (LTI), and Qualifying Income.
More Information
You can find authoritative information on debt-to-income ratios from the Consumer Financial Protection Bureau (CFPB) and IRS guidelines on income.
FAQs
Does DTI affect my credit score? No, but high credit card balances contributing to a high DTI can lower your score.
What’s the difference between front-end and back-end DTI? Front-end DTI covers housing expenses only; back-end includes all debt obligations and is the primary figure lenders evaluate.
Can I get a loan with a high DTI? Some government-backed loans have more flexible DTI limits, and compensating factors like high credit scores or large down payments may help.
Understanding your debt-to-borrower ratio is crucial in managing your creditworthiness and securing favorable loan terms. Staying informed empowers you to make smarter financial decisions.