Straight answer
What is a debt-to-income ratio, and why do lenders care?
It's all your monthly debt payments divided by your gross monthly income, which is your pay before taxes and other deductions. Lenders use it as one way to judge whether you can manage the payments on new money you want to borrow. Different loan products and lenders set different limits, so there's no single number that works everywhere.
How do I work out mine?
Add up your monthly debt payments, then divide by your gross monthly income. For example, a $1,500 mortgage, a $100 car loan and $400 of other debt payments come to $2,000 a month. With a gross monthly income of $6,000, that's a debt-to-income ratio of 33%.
Why gross income and not take-home pay?
That's how the ratio is defined: it uses income before taxes and other deductions are taken out.
How do I lower it?
Either lower the monthly debt payments, by paying debts down or off, or raise your income. Both push the ratio down.
- CFPB — What is a debt-to-income ratio?
Money Mechanics explains how things work in plain language. It is not personalized financial advice.
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