Read our editorial guidelines here . Your debt-to-income (DTI) ratio is how much money you earn versus what you spend. It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”
The Annual Income Debt-to-Earnings Ratio is calculated by dividing the annual loan payment amount by the greater of the mean or median annual earnings. The Discretionary Income Rate is calculated by dividing the annual loan payment by the discretionary income.
The debt ratio, or total debt-to-total assets, is calculated by dividing a company's total debt by its total assets. It is also called the debt-to-assets ratio. It is a leverage ratio that defines how much debt a company carries compared to the value of the assets it owns.
To determine the debt, add the short- and long-term debt of the business together. To find the net debt, add the amount of cash available in bank accounts and any cash equivalents that you can liquidate for cash. Some of the cash equivalents are bank drafts, bonds and cheques.
Taking control of your debt-to-income ratio can help your business and its chances of getting funding at good rates. Ideally, you should aim to have a debt-to-income ratio no higher than 36%.
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
It does not include health insurance, auto insurance, gas, utilities, cell phone, cable, groceries, or other non-recurring life expenses. The debts evaluated are: Any/all car, credit card, student, mortgage and/or other installment loan payments.
Average American debt payments in 2024: 11.5% of income
The most recent debt payment-to-income ratio, from the second quarter of 2024, is 11.5%. That means the average American spends nearly 12% of their monthly income on debt payments.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.
There are some differences around how the various data elements on a credit report factor into the score calculations. Although credit scoring models vary, generally, credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.
According to the Federal Deposit Insurance Corp., lenders typically want the front-end ratio to be no more than 25% to 28% of your monthly gross income. The back-end ratio includes housing expenses plus long-term debt. Lenders prefer to see this number at 33% to 36% of your monthly gross income.
The monthly debt payments included in your back-end DTI calculation typically include your proposed monthly mortgage payment, credit card debt, student loans, car loans, and alimony or child support. Don't include non-debt expenses like utilities, insurance or food.
Dentists' debt-to-income ratios worse than other health workers. Though school debt consistently exceeded income for healthcare occupations -- except for physicians -- between 2017 and 2022, dentists had the highest debt-to-income ratios. The study was published in the American Journal of Pharmaceutical Education.
To calculate your DTI, add up all of your monthly debt payments, then divide by your monthly income. Here's how to calculate your DTI. Total your regular monthly payments for such expenses as credit cards, student loans, personal loans, alimony or child support – anything that shows up on a credit report.
The average American owed $103,358 in consumer debt in the second quarter of 2023, the latest data available, according to credit bureau Experian.
If you're currently leasing an apartment, your monthly rent is typically included in your debt-to-income ratio. Your housing payment is considered a necessary expense, even if you rent.
FHA loans for higher DTI
FHA loans are known for being more lenient with credit and DTI requirements. With a good credit score (580 or higher), you might qualify for an FHA loan with a DTI ratio of up to 50%. This makes FHA loans a popular choice for borrowers with good credit but high debt-to-income ratios.
Divide your total monthly debt payments by your gross monthly income and multiply the result by 100 to get your DTI percentage.
A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.
The times interest earned ratio is usually different across industries but it's generally best to have a times interest earned ratio that demonstrates that the company can earn multiple times its annual debt obligation. It's often cited that a company should have a times interest earned ratio of at least 2.5.
In summary, all debts are liabilities, but not all liabilities are debts. Debt specifically refers to borrowed money, while liabilities refer to any financial obligation a company has to pay.