Generally, a DTI of 20% or less is considered low and at or below 43% is the rule of thumb for getting a qualified mortgage, according to the CFPB. Lenders for personal loans tend to be more lenient with DTI than mortgage lenders. In all cases, however, the lower your DTI, the better.
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.”
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.
Lenders, including anyone who might give you a mortgage or an auto loan, use DTI as a measure of creditworthiness. DTI is one factor that can help lenders decide whether you can repay the money you have borrowed or take on more debt. A good debt-to-income ratio is below 43%, and many lenders prefer 36% or below.
Most lenders see DTI ratios of 36% or less as ideal.
The Federal Reserve tracks the nation's household debt payments as a percentage of disposable income. The most recent debt payment-to-income ratio, from the second quarter of 2023, is 9.8%. That means the average American spends nearly 10% of their monthly income on debt payments.
Interpreting the Debt Ratio
If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.
The maximum DTI for FHA loans is 57%. However, each lender is free to set its own requirements. This means some lenders may stick to the maximum DTI of 57% while others may set the limit closer to 40%. Do your research and speak with each lender you're considering working with.
11% to 20%: Again, shouldn't have trouble getting loans. Time to scale back on spending. 21% to 35%: Although you may not have trouble getting new credit cards, you are spending too much of your monthly income on debt repayment. 36% to 50%: You may still qualify for certain loans, however it will be at higher rates.
$20,000 is a lot of credit card debt and it sounds like you're having trouble making progress,” says Rossman.
The general rule of thumb is that you shouldn't spend more than 10 percent of your take-home income on credit card debt.
The average debt an American owes is $103,358 across mortgage loans, home equity lines of credit, auto loans, credit card debt, student loan debt, and other debts like personal loans. Data from Experian breaks down the average debt a consumer holds based on type, age, credit score, and state.
35% or less: Looking Good - Relative to your income, your debt is at a manageable level. You most likely have money left over for saving or spending after you've paid your bills. Lenders generally view a lower DTI as favorable.
Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it's the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.
DTI less than 36%
Lenders view a DTI under 36% as good, meaning they think you can manage your current debt payments and handle taking on an additional loan.
A DTI ratio is usually expressed as a percentage. This ratio includes all of your total recurring monthly debt — credit card balances, rent or mortgage payments, vehicle loans and more.
Ideally, your front-end HTI calculation should not exceed 28% when applying for a new loan, such as a mortgage. You should strive to keep your back-end DTI ratio at or below 36%.
Broadly speaking, there are two ways to improve your DTI ratio: Reduce your monthly debt payments, and increase your income.
Most lenders look for a DTI ratio of 43% or less, although some will accept up to 50%. Over 50%. If you have a DTI ratio over 50 and you want to get a mortgage you will need to try increasing your income and reducing your debt. It may take some time but with effort it is possible.
As with credit scores, a qualifying debt-to-income ratio (DTI) can vary by the lender. However, the USDA guidelines suggest that borrowers should have a DTI of no more than 41%, meaning your mortgage, household bills, and other debts should account for no more than 41% of your income.
Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow. Different loan products and lenders will have different DTI limits.
The ratio measures the money a company loses on its overall sales due to customer(s) not paying their dues. The average bad debt to sales value in 2022 was 0.16%. The companies with the best ratio (best performers) reported a value of 0.02% or lower.
However, the biggest risk in this scenario is the inability to pay off debts. If an individual is unable to make their debt payments, they may face serious consequences such as damage to their credit score, collection efforts, or even legal action.
As it relates to risk for lenders and investors , a debt ratio at or below 0.4 or 40% is low. This shows minimal risk, potential longevity and strong financial health for a company. Conversely, a debt ratio above 0.6 or 0.7 (60-70%) is a higher risk and may discourage investment.