Debt$-$lo$-$income $($DTI$)$ ratio is the percentage of monthly income that goes toward paying debt.

It's important not to confuse debt$-$to$-$income ratio with credit utilization. which represents the

amount of debt relative to credit card and line of credit limits$,$

Many lenders. especially mortgage and auto lenders, use debt$-$to$-$income ratio to figure out the

loan amount afforded based on current income and the amount already spent on debt.

For example, a mortgage lender will use debt$-$to$-$income ratio to figure out the proper mortgage

payment after all other monthly debts are paid.

You can easily calculate debt$-$to$-$income ratio to figure out the percentage of your income that

goes toward paying down your debts each month.

$1.$ Total Your Monthly Debt

calculate debt$-$to$-$income ratio by dividing your monthly income by your monthly debt payments:

DTI $=$ monthly debt $/$ monthly income

The first step in calculating your debt$-$to$-$income ratio is determining how much you spend each

month on debt. To start, add the total amount t of your monthly debt payments, including the

following:

Mortgage or rent

Minimum credit card payments

Car loan

Student loans

Alimony$/$Child support payments

Other loans or lines of credit

You don't need to include payments you make for car insurance, utilities, health insurance,

groceries and other monthly expenses that don't involve financing. As a general guideline. if it

doesn't show on your credit report. it's not factored into your debt$-$to$-$income ratio by lenders.

$2.$ Total your monthly income:

The next step to determining your debt$-$to$-$income ratio is calculating your monthly income.

Start by totaling your monthly income. Add up the amount you receive each month from:

Gross income from a W$-2$ or self$-$employment

Bonuses

Alimony$/$Child support

Other income from various sources

Income needs to be calculated on a monthly basis.

A weekly income needs to be multiplied by $52$ and divided by $12.$

A biweekly income needs to be multiplied by $26$ and divided by $12.$

A semimonthly income needs lo be multiplied by $24$ and divided by $12.$

$3.$ Once you've calculated what is spent on debt payments and what you receive each month in income, you have the necessary information to calculate the DTI ratio. To calculate the ratio, divide your monthly debt payments by your monthly income. Then multiply the result by $100$ to come up with a percentage.

$4.$ Evaluate results using the following categories:

$36\%$ or less: healthiest debt load for the majority of people. If the DTI ratio falls here, more debt should be avoided to maintain a good ratio. Getting approved for a mortgage with a ratio above $36\%$ could be a problem.

$37\%$ to $42\%$: not a bad ratio, but it could be better. Reducing debts would be prudent if you fall in this range.

$43\%$ to $49\%$: DTI indicates likely financial trouble. Aggressive payment of debts should be implemented to prevent an overloading debt situation.

Over $50\%$: DTI indicates a dangerous financial situation. This means over half of income goes toward debt payments each month.

Exercise

Sam has the following debt expenses and income figures:

Debt:

Mortgage $$950$

Minimum credit card payments $$235$

Car loan $$355$

Income:

Monthly gross income $$3500$

Child Support $$500$

Calculate Sam's DTI ratio and comment on Sam's financial health.