How do you work out your debt-to-income ratio, and what number makes lenders cautious?

Summary

Add up your monthly debt payments and divide by your gross monthly income, meaning pay before taxes and deductions. No single cutoff applies across lenders, and the CFPB says limits differ by loan product and lender. Wells Fargo, for one, treats 35% or less as manageable, 36% to 49% as room to improve, and 50% or more as a level where lenders may limit your options.

The formula and the CFPB's example

DTI = total monthly debt payments ÷ gross monthly income

The CFPB's example has a $1,500 mortgage, a $100 auto loan, and $400 in other debts, which makes $2,000 a month. Against $6,000 in gross monthly income, that's a DTI of 33%.

Wells Fargo lists rent, mortgage, credit cards, and other debt as the payments to count, and says to use the minimum payment for credit cards. Groceries, utilities, gas, and taxes generally stay out. That makes DTI a narrow measure: two people with the same ratio can have very different amounts left over at the end of the month.

Adding a personal loan to the picture

Start from the CFPB's $2,000 in payments on $6,000 of income, then add a $10,000 personal loan at 12% for 36 months, which costs $332.14 a month.

If the loan is new borrowing on top of everything else, payments rise to $2,332.14 and DTI goes from 33.3% to 38.9%. That moves it out of Wells Fargo's lowest band.

If the loan pays off the $400 of other debts, that payment disappears. Payments fall to $1,932.14 and DTI drops to 32.2%. Counting both the old $400 and the new $332.14 would put you at about 45.5%, a number that describes neither situation.

What the Wells Fargo bands say

Wells Fargo publishes these as the guidelines it uses:

35% or less: debt is at a manageable level relative to income, and lenders generally view a lower DTI as favorable.
36% to 49%: you're managing debt adequately but may want to bring the ratio down, and lenders may ask for additional eligibility criteria.
50% or more: you may have limited money to save or spend, and lenders may limit your borrowing options.

Other lenders set their own limits. The CFPB describes DTI as one way lenders measure your ability to manage the monthly payments on money you plan to borrow.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pricing pages on the dates shown. We have not used these products. Corrections: contact form.