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Most Asked Questions About Debt-to-Income Ratio

Looking to finance a car, buy a house, or consolidate debt? Debt-to-income ratio determines the likelihood of finding a lender. For this reason, estimating this number in advance of a loan application where it is used best. Besides giving the applicant an idea of the risk of having too much debt, the debt-to-income ratio helps lenders predict whether or not the borrower is in danger of defaulting on credit lines and loans in the future. Free debt counseling will give you a better understanding of DTI importance.

man calculating debt-to-income ratio before getting free debt counseling

Frequently Asked Questions About Debt-to-Income Ratio – Answered!

What Is It?

Debt-to-income ratio (DTI) is a quick comparison of how much you owe each month to how much you earn. Moreover, DTI is the percentage of personal income before taxes that goes to paying credit cards, rent, mortgage, or other debt.

Why Is It Important?

Besides letting you know whether or not you have too much debt, your DTI ratio determines your likelihood of affording another loan. Since DTI measures monthly debt payments and any  money you plan to borrow, lenders will use DTI to determine borrowing risk.

While having a low DTI ratio shows a healthy balance between debt and income, a high DTI signals that a person has too much debt compared to monthly income. A borrower with a low DTI is statistically more likely to manage their monthly debt payments effectively.

In contrast, a borrower with a high DTI ratio is more likely to have problems paying debts. For this reason, creditors and lenders want to see a low DTI before lending money to borrowers.

What My DTI May Include?

It’s worth noting that some of the monthly obligations included in your DTI may surprise you. These include the following:

  • Private mortgage insurance premiums
  • Homeowner’s association dues
  • Homeowner’s insurance
  • Alimony payments
  • Child support payments

What My DTI Doesn’t Include?

Many people assume that all monthly obligations are included in their DTI. However, they’re not. The following are typically not included:

  • Income tax
  • Childcare cost
  • Cable or satellite TV bill
  • Movie channel subscription
  • Music subscription
  • Home phone or cell phone bill
  • Car insurance premium
  • Health insurance premium
  • Life insurance premium
  • Landscaper contract fee
  • House cleaning contract payment
  • Power bill
  • Heating bill
  • Internet
  • Water-sewer-trash bill
  • Gym membership fee
  • Storage unit payment

What Sources of Income Does My DTI Not Include?

Lenders want to see if the second portion of DTI, which is income, is reliable and regular because they’ll use it to check ability to pay for new loans. DTI generally consists of the following forms of income:

  • Tips and bonuses
  • Gross income
  • Pension income
  • Rental property income
  • Side gig income
  • Self-employment income
  • Lottery winnings annuities
  • Alimony received
  • Child support received
  • Social security retirement income
  • Supplemental security income
  • Social security survivor benefits
  • Social security disability insurance

What Sources of Income Aren’t Included in My DTI?

Since lenders lend real money, they don’t base their decisions on unpredictable or temporary income. When calculating a potential borrower’s DTI ratio, most lenders exclude the following sources of income:

  • Business gross income
  • Informal income such as lawn-mowing and babysitting
  • Gambling winnings
  • Cash gifts
  • Investment account’s value
  • Loan payments from friends or family
  • Spouse’s income, if they’re not applying for a joint account
  • Family member’s income
  • Tax refund

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DebtHelper.com is a 501c3 qualified IRS Non-Profit Florida Corporation committed to educating, advising, and empowering individuals to overcome financial difficulties and improve their lives. Contact us today if you need to speak with one of our multinational, multilingual, and qualified counselors.

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