How to Calculate Debt to Income Ratio

A debt-to-income ratio is a calculation of how much money you owe each month as compared to how much money you receive each month. Knowing this figure can prevent you from getting into financial difficulty and can help you secure loans and credit in the future. Keep reading to learn about how to calculate that ratio, as well as what to do once you have the number in hand.

Part 1

Part 1 of 4:

Calculate Your Debt

1
Figure out your monthly housing costs. Housing costs include the cost of your rent or mortgage, the price you pay for house or apartment insurance, property taxes, and housing association fees.
- If you are looking at getting a loan for a mortgage, you might need to use your proposed monthly housing expenses rather than your current expenses.
- Example: If you currently pay $700 in rent and an additional maintenance fee of $20, you need to start your debt calculations with that full $720.
2
Factor in costs related to transportation. Any payments you make on a car, motorcycle, or other vehicle should be included in your debt calculations, as well as any insurance you pay on those vehicles.
- If you use public transportation, use any fees you pay to maintain your bus pass or an average amount of bus fare you pay on a monthly basis.
- Example: If you pay $120 on your car each month and pay an addition $90 on car insurance, you need to add the $210 you spend on transportation to the $720 you spend on housing, giving you debt of $930.
3
Include the cost of credit. Your minimum monthly payment for any credit cards you owe must also be added into your total monthly debt.
- Do not include credit card balances that you pay in full each month.
- Example: If you only pay a minimum monthly payment of $15 for one card and pay the rest of your credit card balances off in full each month, add that $15 to the existing $930, giving you a debt of $945.
4
Add in loan payments. The amount of money you pay on a monthly basis for student loans, payday loans, investment loans, and other personal loans should be included in your debt calculations.
- Example: If, on top of the other forms of debt already mentioned, you are paying three student loan payments each averaging $80 a month, your loan payment debt is $240. Add this to your existing $945, giving you a debt of $1185.
5
Include alimony and child support, when applicable. If you make these types of legal, personal payments to other people, add the cost of these payments to your debt.
- Example: If you have no alimony or child support, your debt will not increase or decrease due to these legal obligations.
6
Figure out any other monthly costs. In addition to those costs already mentioned, you should also note any other debts or money you owe on a monthly basis.
- Understand that most personal and flexible costs, including those spent on food, childcare, clothing, and entertainment, do not count toward your monthly debt when calculating this ratio.
- Costs like payments made on past medical conditions can factor into your overall debt, however.
- Example: If you are presently making a payment of $115 per month on a past operation, add this amount to you current debt amount of $1185, giving you a total monthly debt of $1300.
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Part 2

Part 2 of 4:

Calculate Your Income

1
Use your gross income figures. When calculating your income for you debt-to-income ratio, use the amount of money you make before taxes and not what you make after taxes are taken out.
- Example: If the person in the example continued from above makes $39,000 on a yearly basis before taxes, or $750 a week before taxes, one of these figures should be used instead of a net income figure.
2
Determine your monthly income. Divide your annual gross income by 12 to determine your average monthly income.
- If you do not know your annual gross income, take your weekly income and multiply it by the number of payments you receive in a year. If you get paid every other week, this would be 26 payments; for payment that occurs weekly, this would be 52 payments. This will give you your annual income, and you can divide this number by 12 to determine your monthly income.
- Alternatively, you can take your weekly payment and multiply it by 4.3 or multiply your bi-weekly pay by 2.15 to determine your rough monthly income.
- Example: If a person's yearly gross income is $39,000, then: 39000 / 12 = $3250
  - If a person's weekly gross income is $750, then: 750 * 52 = 39000; 39000 / 12 = $3250
  - Alternatively, if a person's weekly gross income is $750, then: 750 * 4.3 = $3225
3
Add in any other regular payments you receive. If you received commissions, bonuses, tips, overtime, or money from other sources, like alimony, rental income, investment income, pension, disability, or child support, add that money to your monthly income.
- Example: If you receive investment income of roughly $200 each month, add that to your monthly gross income of $3250, giving you a total income of $3450.
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Part 3

Part 3 of 4:

Calculate the Ratio

1
Divide your monthly debt by your monthly income. This ratio is a ratio of your debt compared to your income, so you would divide the amount of debt you have by the amount of income you have. The amount of monthly debt you have should be smaller than the amount of monthly income you have.
- Example: If your monthly debt is $1300 and your monthly income is $3450, then:
  - 1300 / 3450 = 0.3768
2
Turn this number into a percentage. Multiply the decimal answer you get in your initial calculations by 100 to come up with a ratio percentage. This is the figure you will use for all practical purposes.
- Example: 0.3768 * 100 = 38%
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Part 4

Part 4 of 4:

Analyze and Understand the Ratio

1
Know how your ratio looks to lenders. In most instances, creditors and lenders want to see a debt-to-income ratio of 36 percent or less. If your debt-to-income ratio is higher than this percentage, you might have difficulty securing a loan until after that percentage drops.^{[1]XResearch source}
- A ratio of 19 percent or less is ideal, and if you can secure this level of financial security, you should have very little problem securing loans or taking on new credit.
- A ratio between 20 and 36 percent or less will usually be deemed healthy enough to secure a loan from most lenders, but you should begin cutting back once you .
- If your debt-to-income ratio is between 37 and 42 percent, you are in a state of minor financial crisis and may not be able to get any loans or new lines of credit.
- At a ratio between 43 and 49 percent, you will likely begin seeing financial difficulties in your everyday life in the near future.
- If your ratio is 50 percent or higher, you need to seek professional help to quickly reduce your debt.
2
Understand the difference between front-end and back-end debt. These are terms that are used when you are looking to secure a mortgage loan. Front-end debt ratios only use proposed monthly housing expenses, while back-end debt ratios use all existing debt and any new projected monthly mortgage payments.^{[2]XResearch source}
- For most purposes, you should look at your back-end debt. Many lenders will usually look at front-end debt, but as a borrower, you should look at both front-end and back-end debt to determine how much you can actually afford regarding new loans and credit.
- Front-end debt-to-income ratios are also known as housing-expense-to-income ratios. This percentage should be at or below 28 percent, while a back-end debt-to-income ratio should be at or below 36 percent.
3
Take steps to lower your debt-to-income ratio, if necessary. If your debt-to-income ratio is higher than you would like it to be, you can help lower it by implementing lifestyle changes that decrease your debt levels.^{[3]XResearch source}
- Increase the amount of money you pay toward your debts. If you can manage it, make extra payments toward your loan, house, car, or any other debt for which there is a principle you must pay off in addition to interest. Make sure that the payment goes toward your principle. This will lower your overall debt faster.
- Do not take on more debt. Put away the plastic and avoid making more purchases on your credit card. Do not apply for any other loans or lines of credit, either.
- Avoid making any large purchases. If you do not have much savings built up right now, wait until you do. This will allow you to make a larger down payment, and as a result, less of your purchase will be funded with credit and you can reduce the amount of debt you accumulate.
4
Monitor your debt-to-income ratio periodically. Whether your debt-to-income ratio is healthy or not, monitoring it continually can help you avoid major credit problems. You should keep an eye on it even if you do not plan to make a major investment any time soon.^{[4]XResearch source}
- If you know that your debt-to-income ratio is on the high end, keep tabs on it every month. Otherwise, checking the ratio once or twice a year should suffice.
- Having too much debt can lower your credit score, causing your lending limits to decrease and your interest rates to increase.
- Monitoring this ratio can help you make better decisions about buying on credit and taking loans out. It can also make the benefits of making more than your minimum credit card payments more evident and allow you to avoid major credit or financial problems in the future.
- If your debt-to-income ratio rises too high, you could have difficulty making major purchases and you might lose out on the lowest interest rates and best credit terms.
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