DTI is an important calculation in today’s financial world, we’ll show you how to calculate it, and discuss in detail what DTI is, why it is so important and how you can manage it.

DTI, or debt to income ratio, is the ratio of debt to income a borrower has.  The higher the DTI, the less disposable income a borrower may have, and the higher their credit risk could be.  DTI requirements can vary from loan program to loan program, but typically they will fall out between 28% and 50%.

For our example, we will use 50% for our maximum DTI, just to keep the numbers simple.  In a nutshell, if you have $5,000 per month of gross income, you take 50% of that number ($2500) and that is the maximum amount of monthly obligations you can have to stay at or below the 50% DTI number.  Typically, the debt that is calculated for DTI calculations includes your minimum monthly payments on all credit cards, installment loans, student loans, mortgages, etc.  In addition, your property taxes and insurance will be calculated into this ratio.

DTI is incredibly important, as it lets the lending institution know that you have the ability to make payments on a new loan.  If you have no disposable income, you will likely end up defaulting on some loan at some time (remember, DTI does not calculate your monthly living expenses such as gas, food, clothing, etc).

This brings us to the topic of managing your DTI.  Especially when buying a home, everyone talks about credit being the most important element.  This may be true, but not many people tell you to manage your DTI, and this can hurt your prospects for obtaining a loan if you fail to address this number as well.

The first thing you need to do when looking to manage your DTI is to know what your credit report looks like.  Go here to get a free credit report if you don’t have one.  Your credit report will give you a lot of information, but the most important numbers for DTI purposes are the monthly payment numbers.  These will be the numbers used to calculate your DTI.

If you are planning to buy a home, and want to manage your DTI to maximize the amount you can borrow, there are a few easy things you can do.  First, don’t buy a new car or other large purchase.  Wait until after the home is purchased.  Second, take a look at your credit cards and their minimum payments.  This is what matters in the DTI calculations, and moving debt around to take advantage of the lowest minimum payments could be a good idea if you want to increase the amount you can borrow through DTI management.  Additionally, if you have student loans, get them deferred for a period of time.  If your student loan is deferred, you do not have to calculate that debt when making a DTI calculation.

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