The Easiest Way To Calculate Your Debt-To-Income Ratio

When it's time to start considering if you need to get a new credit card or if you're thinking of applying for a loan to help you out with your next car or home purchase, then you should have certain information at the ready. In these cases, it would help to prepare your debt-to-income ratio. But why exactly is this percentage significant to lenders and more importantly, how can you calculate it yourself?

Potential lenders want to know before they approve a loan, that there is a good chance it can be easily paid back. One way of knowing this is to find out if their clients have a good low debt-to-income ratio. This means that when you balance all of your debts — such as rent or mortgage, car loans, student debt, etc. — and match them to your monthly income, you have enough money left over to be able to pay back the loan you're applying for.

So let us take a look at how exactly you can calculate this ratio and what are the percentages that lenders are looking for to make you a good candidate for your next loan.

Finding out your debt-to-income ratio can be fairly easy. First, tally up all of the monthly costs associated with your current debts. This includes mortgage or rent, credit card payments, car loans, student loans, child support or alimony, and any other debts that you have. A good thing to note is that expenses such as utilities, groceries, or other expenditures are not a part of these configurations as they don't contribute to your debt.

Once you have that number worked out, calculate your monthly income. This should be your gross income, not net income, which means it should be what you earn before taxes are considered. Finally, take the total amount of your monthly debt and divide it by your monthly income. When you do so, you're left with your debt-to-income ratio.

The lower this number is, the more favorable you're likely to be for a loan. Ideally, what lenders are looking for is a debt-to-income ratio of 36% or less, according to Chase. This percentage lets them know you have the income to cover your current debt obligations with enough left over to take on new loans or investments. Although percentages ranging from 36% to 49% might still earn you loan approval, once your debt-to-income ratio reaches over 50% is when lenders will begin to see you as a more risky borrower.