Debt-to-income ratio

A debt-to-income ratio is a lender's question asked in the borrower's numbers: of every dollar you earn before tax, how many cents are already promised to a debt payment? It counts the payments, not the balances, so a $20,000 car loan and a $3,000 card balance enter it as a $380 payment and a $90 minimum, and it counts income at gross, before taxes and deductions. A lender computes it with the new loan's payment included, so the ratio that matters for a mortgage is the one you would have after the mortgage, not the one you have today.

In a sentence

• "Their debt-to-income ratio is 38%, $2,460 of monthly payments against $6,500 of gross income, and the common mortgage guide is under 36%."
• "Paying off the car loan takes the debt-to-income ratio from 38% to 32%; paying $1,000 toward the card barely moves it."
• "A debt-to-income ratio looks at the payments against the paycheck; credit utilization looks at the balances against the limits."

How it's calculated

Debt-to-income ratio = monthly debt payments ÷ gross monthly income

1. Add up the monthly payment on every debt: rent or the mortgage payment, with property tax and insurance when the lender counts them, car loans, student loans, personal loans, the minimum payment on each card, and any court-ordered support payments. Lenders take the payments from the credit report, so a card counts at its minimum even when you pay it in full.
2. Leave out everything that is not a debt: utilities, phone, groceries, insurance premiums other than those inside the mortgage payment, subscriptions, childcare and taxes.
3. Divide by gross monthly income, salary before taxes plus any other income the lender will count, and read the result as a percentage.

Two versions are used for a mortgage.

A debt-to-income ratio named without qualification is the back-end figure; the guide is where the payment stops being comfortable, not where approval stops.

An example

A household earning $78,000 a year, $6,500 a month gross, applying for a mortgage whose full monthly payment would be $1,750.

The housing payment fits the 28% guide on its own; the whole set of payments does not fit the 36% one, by $120 a month. Paying off the car loan removes its $380 and brings the back-end ratio to 32%; paying $1,000 toward a card balance changes its minimum by about $30 on a common minimum formula and leaves the ratio where it was. Measured against take-home pay of $4,900 instead of gross, the same $2,460 is 50% of what actually arrives, which is why the ratio reads more comfortably than the month feels.

Why it matters

The ratio is the gate on the largest loans. A mortgage or a car loan is approved on the payment your income can carry, and the ratio is how the lender measures that, so it decides whether the application goes through and sometimes the rate. It moves only when a payment changes, which is the part households get wrong in the months before applying: paying down balances lowers utilization and helps the credit score, but paying off one whole loan, the one with a real payment attached, is what lowers the ratio. A ratio above the guide on gross income is also a month with little room on take-home, whatever a lender thinks of it.

Debt-to-income ratio versus credit utilization

A debt-to-income ratio compares monthly payments with gross monthly income; credit utilization compares card balances with card limits. The first is computed by a lender from your income and the payments on your credit report and is not part of your credit score; the second is read from the report and is one of the score's heaviest factors. They move on different levers: paying a card down before the statement closes lowers utilization at once and changes the ratio by a few dollars of minimum payment, while paying off a car loan removes a payment from the ratio and changes utilization not at all. A lender reads both. See Credit utilization.

Common questions

Is a debt-to-income ratio the same as credit utilization? No. The ratio is payments over gross income, on every debt; utilization is balances over limits, on cards only. One is a lender's affordability check and the other a component of the credit score.

What is a good debt-to-income ratio? The common mortgage guide keeps the full housing payment at or under 28% of gross monthly income and all debt payments together under 36%. Lenders apply their own limits and some programs allow more, but under the guide is where the payment leaves room for everything the ratio does not count.

Does rent count in a debt-to-income ratio? Yes, as the housing payment. On a mortgage application the proposed mortgage payment takes the place of the rent, since the one replaces the other; on a car or personal loan application the rent stays in.

Do utilities and groceries count? No. Only debt obligations go on top of the fraction, which is why the ratio understates what a month costs: a household at 36% on gross income still has taxes, insurance, food, utilities and childcare to pay from the other 64%.

Does paying down a credit card lower my debt-to-income ratio? Only by as much as it lowers the minimum payment. On a common minimum formula, 1% of the balance plus the month's interest, paying $1,000 toward a $3,000 balance at 24.99% APR lowers the minimum by about $30. Paying the card off entirely removes its minimum, which is what moves the figure.

Go deeper

• The Mortgage calculator estimates the full monthly payment on a home, principal and interest plus property tax, insurance, HOA dues and PMI, which is the housing payment the ratio is computed on.
• The Debt payoff calculator lists your cards and loans and shows when you are debt-free under the avalanche and snowball methods, and the order the debts fall.
• How to combine finances when one of you has debt shows the two ways a couple can treat one partner's payments, side by side on the same debt.

Where it shows up in Zypper

Zypper lists the payments the ratio is made of. Each loan payment and each card payment is identified as a recurring group automatically from the pattern of your transactions, with its frequency, its next expected payment and amount, and its history on the recurring page, so the payments on top of the fraction are in one list. Income categories on the budget page show what you expect to earn and Earned, what has actually come in; what arrives in the account is take-home pay, so the ratio a lender computes on gross income still starts from a pay stub. See Recurring transactions and bill tracking and Creating your budget for the details, or get started with Zypper to see every payment in one list.