Debt-to-Income, or DTI, is what lenders consider when deciding whether or not you qualify for a loan with them. Basically, it is a percentage that shows how high your debt is, so the lender knows if you are likely to be able to pay your new debt each month. The equation used to calculate DTI looks like this:
DTI = (Debt ÷ Income) × 100
DTI and your credit report are used to determine whether or not you will qualify for a loan, so it is a pretty important part of your financial health.
What is included in DTI?
Not all monthly expenses are included when calculating your DTI:
However, if you are looking to make a purchase that would cause you to no longer have one of the included debt payments (such as you want to buy a house, so you would no longer have the rent payment; or you want to get a new car, so you would sell your current car and no longer have that car payment), the loan officer will take that into consideration when calculating your DTI.
John Doe pays $500 for rent, $100 for his car loan, and $100 for his student loan every month, so his monthly debt is approximately $700. His monthly income is about $2,000. If we use the formula given earlier:
DTI = ($700 ÷ $2,000) × 100 = 35%
John’s DTI is 35%, which is pretty average.
Jane and her husband, Joe, pay $1,000 for their mortgage, $250 for one car loan, $350 for the other car loan, and have a credit card with a minimum payment of $50, so their monthly debt is approximately $1,450. Jane’s income is $2,000/month, and Joe’s is $1,750/mo, so their combined gross income is $3,750. If we use the formula given earlier:
DTI = ($1,650 ÷ $3,750) × 100 = 44%
Their DTI is 44%, which is considered pretty high. They will likely have difficulty getting a new loan with decent terms, unless they are planning to sell one of their current vehicles or house in order to get the new loan.
If you have any questions about your DTI or being approved for a loan, our loan officers are standing by and ready to help! Call, email, or stop by today to speak with an MTEFCU loan officer.