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WalletPrep worksheet · Debt

What is a good debt-to-income ratio?

Name ____________________ Date __________

Key ideas

  1. DTI uses gross income, before taxes. Divide your total monthly debt payments by what you earn before taxes and deductions, not by your take-home pay.
  2. 36% or less is a common target. Fannie Mae's standard limit on manually reviewed mortgages is 36%, rising to 45% or 50% in some cases.
  3. Paying off a whole debt lowers DTI fastest. DTI counts monthly payments, not balances. Clearing Chris's $100 card minimum drops his DTI from 38.2% to 36.4%.

Vocabulary

Debt-to-income ratio
Your total monthly debt payments divided by your gross monthly income, shown as a percentage. Lenders use it to judge whether you can take on a new payment.
Gross income
Your total pay before any taxes or deductions are taken out. Salary offers and loan applications usually ask for this number.
Minimum payment
The smallest amount you must pay on a credit card or loan by the due date to keep the account in good standing.
Credit score
A 3-digit number, usually from 300 to 850, that predicts how likely you are to repay debt on time. Lenders use it to set rates.
Take-home pay
The money that actually lands in your bank account after taxes and payroll deductions come out of your paycheck.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.

Work it out

Chris earns $66,000 a year, so $5,500 a month before taxes. He has a car loan, a student loan and one credit card, and wants a mortgage with a $1,400 monthly payment.

  1. Car loan payment
  2. Student loan payment
  3. Credit card minimum
  4. Current debt payments
  5. DTI today (÷ $5,500)
  6. New mortgage payment
  7. Debt payments with mortgage
  8. DTI with mortgage
  9. Pay off the card
  10. Debt payments, card paid off

Check yourself

  1. Your debt payments are $1,200 a month and your gross monthly income is $4,800. What is your DTI?

    • A. 20%
    • B. 25%
    • C. 30%
    • D. 40%

  2. Which of these usually counts in your DTI?

    • A. Your electric bill
    • B. Your groceries
    • C. Your credit card minimum payment
    • D. Your phone bill

  3. Which move lowers DTI the fastest with the same amount of money?

    • A. Paying off a small debt in full
    • B. Splitting extra money across all debts
    • C. Opening a new credit card

Your turn

List every monthly debt payment from your statements and add them up. Divide by your gross monthly income from your pay stub. If you are planning a big loan, add the new payment and see where you land.

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Answer key

What is a good debt-to-income ratio?

Work it out

  1. Car loan payment$380
  2. Student loan payment$220
  3. Credit card minimum$100
  4. Current debt payments= $700
  5. DTI today (÷ $5,500)12.73%
  6. New mortgage payment$1,400
  7. Debt payments with mortgage= $2,100
  8. DTI with mortgage38.18%
  9. Pay off the card− $100
  10. Debt payments, card paid off= $2,000
  1. Chris's debt payments are $380 + $220 + $100 = $700. $700 ÷ $5,500 = 12.7% DTI today.
  2. With the $1,400 mortgage, payments are $2,100. $2,100 ÷ $5,500 = 38.2%, just over the common 36% target.
  3. If he pays off the card first, payments drop to $2,000. $2,000 ÷ $5,500 = 36.4%, close to the target and a stronger application.

Check yourself

  1. B. 25% $1,200 ÷ $4,800 = 0.25, so the DTI is 25%.
  2. C. Your credit card minimum payment DTI counts debt payments like loans and credit card minimums. Utilities, food and phone bills are living costs, not debts.
  3. A. Paying off a small debt in full Paying off a debt removes its whole monthly payment from the total. Spreading money around lowers balances but often leaves every payment the same.