Debt-to-Income Ratio Calculator

By Stock Research Pro • March 30th, 2011

Debt-to-income ratio (DTI) provides lenders with an important measure of a potential borrowers’ credit-worthiness. Mortgage lenders, for example, will use the ratio to determine whether a potential borrower presents too high a risk for lending. Individuals and families can use the debt-to-income ratio to help them gauge whether they are spending too much money and compiling a debt load that might lead to financial problems down the line.

Calculating the Debt-to-Income Ratio

The formula for the debt-to-income ratio can be written as:

Monthly Debt / Monthly Income * 100 (and expressed as a percentage)

In making an evaluation regarding a potential borrower’s credit-worthiness, most lenders want to see a measure of 35% or less. In general, anytime an individual or family has a DTI ratio that calculates to 45% or higher, there is cause for concern. While it seems that many people do not know or are afraid to find out what their DTI ratio is, it can be a good idea to run the calculation to determine if you need to make spending and lifestyle changes to bring your debt under control.

Steps to Take if Your Debt Load is Too High

If you run the DTI measure and find that your debt load is too high, there are some simple steps you can take to improve your personal financial position:

  • Analyze and prioritize your spending- As a first step, you should review your spending to determine areas where you can cut back. Chances are you have a set of fixed costs (e.g. rent or mortgage and utilities), but many other items should represent potential areas for savings.
  • Negotiate where you can- Some of your creditors, particularly high-interest credit card debtors, may be open to negotiation regarding your interest rate or payoff balance. You should simply call the card issuer and ask.
  • Adhere to your new spending habits- To keep yourself out of future trouble, you should create and adhere to a monthly budget that leaves with you a surplus of money each month for saving and investing.
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    The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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