This debt to income ratio calculator (or DTI calculator for short) is a handy tool for every person who has taken any kind of loan, including a mortgage. It will tell you how profoundly indebted you are and whether you can afford yet another loan without disastrous consequences.
Read on to learn how to calculate your debt to income ratio, or - if your mortgage plan is a bit more complicated - jump to the partially amortized loan calculator!
How to calculate debt to income ratio?
The DTI (debt to income) ratio is a measure of how indebted you are, calculated relative to your regular income. After all, a payment of $200 a month can be a burden for some, while millionaires are not likely to even notice it.
Mathematically, DTI is your debt (recurring every month) expressed as a percentage of your monthly income:
DTI = debt / income * 100%
For example, if you make $2000 a month, and your monthly loan payment for your new car is $500, you can determine your DTI as follows:
$500 / $2000 * 100% = 25%
If you open the advanced mode, you will also be able to use this debt to income ratio calculator to estimate whether you can take an additional loan. For example, we can assume that your bank allows you to have a maximum DTI of 33%. Knowing your current debt of $500 a month and your income, you can easily figure out what is the additional allowed loan:
33% * $2000 = $660 is the maximum total debt.
$660 - $500 = $160 is the additional loan you are still allowed to take.
Interpreting the results
Now that you know what you DTI is, you can assess the result. Naturally, the lower it is, the better - after all, you want as little money as possible to go towards your debts. If in doubt, you can stick to the following guidelines:
DTI < 20%: excellent! While you should pay off your debt as soon as possible, this debt to income ratio should allow you to live the lifestyle you want without major constraints.
DTI between 20 and 36%: healthy. You should avoid incurring more debts, and might have a problem getting approved for a mortgage or yet another loan. Still, you are in a relatively good situation.
DTI between 37% and 42%: troubling. You probably won't get approved for any additional loans; you should start working on a plan that will help you reduce your debts.
DTI between 43% and 49%: dangerous. Such a debt to income ratio indicates financial trouble. You should devote as much money and energy as possible to pay off your loans.
DTI over 50%: extremely dangerous. More than half of your income is used to pay off debts and mortgages. If you're not following a strict payment plan yet, don't hesitate to consult a financial advisor and get professional help.
If you're planning to purchase a real estate property and take a mortgage for that, consult our loan to value calculator, too!