What Is a Debt-to-Income Ratio?
Your Debt-to-Income Ratio (DTI) is a simple math formula lenders use to figure out how much money you can realistically afford to pay back and therefore, how much you can safely borrow.
If you total up all of the bills you pay every month and divide that number by your income, the result is your DTI.
Example
Let’s use easy numbers. Suppose you earn $10,000 per month. After adding up all your bills, the total comes to $2,500 per month.
That means your Debt-to-Income Ratio is:
2,500 ÷ 10,000 = 0.25 → 25% DTI
Your total monthly bills are 25% of your income.
What Is Considered a Good DTI?
A DTI below 33% is considered healthy and acceptable by most lenders. The higher the number, the harder it becomes to get approved for credit or good terms.
Most lenders will NOT approve you for anything if your DTI is above 50%.
The Lower Your DTI, the Better
A low DTI makes you far more appealing to lenders even if you have limited or no credit.
This is why a young rockstar or athlete with million$ of dollar$ but zero credit history can finance a Lamborghini, while someone earning minimum wage with an 830 credit score but a DTI of 65% will be denied for a used Chevy.
Remember!
The system is designed to justify charging you as much as possible. Paying your bills on time and not borrowing more than you can afford helps you maintain a low DTI— giving you better financial opportunities.
A low DTI also means you have enough disposable income to enjoy life. This is the power of living within or below your means. You get comfort and low stress.
A high DTI means you're working just to pay bills and feeling the squeeze of financial pressure. So, everyday feels like a struggle even if you have nice things.
BEWARE THE DEBTFOOL!