What is DTI ratio?
Before you can improve your DTI ratio, it helps to know what a DTI ratio is. DTI stands for debt-to-income. It’s a comparison of your monthly debt payments versus your monthly income. Your calculated DTI ratio is used to help lenders get an idea of how well you manage monthly expenses, which helps them determine if you’ll be able to repay a loan.
What factors into your DTI ratio?
All monthly debt payments, including:
- Mortgage payment
- Student, auto, or personal loan payment
- Credit card payments
- Any other personal debt
How to calculate your DTI ratio:
- Add up all of your monthly debts, including rent or mortgage payments, student loans, personal loans, auto loans, credit card payments, child support, alimony, etc.
Recurring monthly debt: ________________________
- Determine your gross monthly income (your monthly income before taxes and other monthly deductions are taken out).
Gross monthly income: ___________________________
- Divide your recurring monthly debt amount by your gross monthly income.
Debt-to-income ratio = _____________________ %
The Ideal DTI ratio is 43% or less.*
Three ways to improve your DTI ratio
We’re all living in a “new normal”, and you might need to make some financial adjustments. Having a plan, prioritizing spending, and using resources efficiently are key to your financial stability moving forward. If you’re using more than 50% of your monthly income to pay off debt, here are three ways to improve your DTI ratio.
1. Increase your income to pay off debt.
Have you considered a side hustle? According to Bankrate, more than 44 million Americans** are using their not-so-hidden talents to make extra money. Although you might not be able to use that additional income to apply for a loan, it is a great way to pay down your current debt.
Increase your skills or add to your education and experience, which could qualify you for a raise, a promotion or a new position. A person who makes $2,000 each month and pays $1,000 toward loans has a 50% DTI. But if that monthly income increased to $3,000, your DTI would go down to 33%.
2. Lower your debts and financial obligations.
Increase the amount you pay monthly toward your debt. Extra payments can help lower your overall debt more quickly.
Consider refinancing or consolidating your current loans to reduce monthly payments. Rates are near record lows, and we can help. Learn more here.
Reduce your credit card debt. Credit card debt usually carries a high interest rate and should be paid off every month in full whenever possible. If you’re looking to consolidate debt, our Prime Platinum Visa Credit Card is the number one low ongoing rate credit card in the country.***
3. Combine numbers one and two.
Recalculate your debt-to-income ratio monthly to see if you’re making progress. Watching your DTI fall can help you stay motivated to keep your debt manageable.
You can also use our various financial calculators to further educate yourself on financial topics.
Wherever you are in your financial journey, don’t lose track of your debt-to-income ratio. It’s a good measure of your financial health, and it may come in handy in the near future.
For more resources to help guide you and your personal finances, check out the LMCU podcast “Wallet Wisdom” by clicking here.
*Credit Karma, 2019. **Over 44 million Americans have a side hustle. Bankrate, July 12, 2017. ***Nerd Wallet, 2019.
Topics: Home Financing & Renovation