Understanding your
debt-to-income ratio (DTI)

Your DTI is another important piece of your
overall financial picture. Along with your credit
report and credit score, your DTI is used by lenders to determine your ability to afford and pay on a loan.


Calculating your DTI

Here’s how Turbo calculates your DTI:

With your permission, Turbo will add up all of your
monthly debts and divide that number by your verified monthly gross income1. Your monthly debts include things like minimum payments on credit cards, auto loans, student loans, mortgage payments, and personal loans. The total amount is then multiplied by 100 to achieve your actual
DTI, as a percentage.


What’s a good DTI?

With DTIs, a low number shows a good balance
between what you owe and your overall income.
In addition, a lower number also could help your
credit score.

While standards and guidelines vary from lender
to lender, typically lenders like to see a DTI below
36%, depending on the loan. In the case of home
loans, some mortgage lenders allow a DTI up to 43%.

Improving your DTI

By focusing on reducing your debt and increasing your income, it’s definitely possible to lower your
debt-to-income ratio. Here are six tips to achieve a lower DTI:

  • Create a budget, track
    spending and
    reduce unnecessary expenses

    By doing this, you’ll have a clearer snapshot of where your money is going and also free up extra money to pay down
    your debt.

  • Speed up your debt payoff

    Try the debt avalanche method, where you tackle your debt with higher interest rates first while making minimum payments on other loans, then move on to the next highest account. Or do the debt snowball method, where you pay down smaller balances first.

  • Avoid more debt

    This includes taking out new loans, or making large purchases on your credit card. Taking out new loans can both drive up your DTI and impact your credit score, as can too many
    credit inquiries.

  • Look for ways to lower your
    interest rates

    Call credit card companies to see about lowering your high-interest credit card rates, especially if your account is in good standing. Or consider consolidating debt to a card with a
    lower rate.

  • Refinance with another lender

    Refinancing might be an opportunity to achieve a lower interest rate and even change your repayment terms. By doing this you could potentially lower your monthly payments, which would help lower your DTI.

  • Increase your income

    See if you can negotiate a higher salary by asking your employer for a raise. Start by laying the groundwork, taking on extra responsibilities and boosting your performance. Or look into earning extra with a side business.

How lenders may view your DTI

Typically, if you have a higher DTI you could be seen by lenders as riskier to lend to. On the other hand, a lower
DTI may indicate to lenders that you're able to pay your debts and live comfortably. Here's a general look at how
some lenders might view a range of DTI.

  • Less than 36%: Very good/
    favorable ratio

  • 36% to 49%: Room for
    consider steps for
    lowering DTI

  • 50% or more: Limited funds for
    saving and/or spending


Does your DTI affect your credit score?

Not directly. However, the debt you carry is related to factors that may impact your credit score, such as your credit utilization ratio (the amount of available credit you are currently using).

How does DTI factor in to qualifying for a mortgage, car loan, or student loan?

Lenders want to know that you can actually afford to repay your loan, and DTI is one of the factors they use to do this. A higher DTI ratio may make you appear to be a riskier borrower, especially when it comes to something like a mortgage, since you might not be in a position financially to take on any additional debt.

Will borrowing from a 401(k) affect my DTI?

Borrowing from your 401(k) does not affect your DTI, since your 401(k) loan isn’t technically a debt. While a 401(k) loan may be a new monthly obligation, lenders don’t factor in your 401(k) loan payment the same way they would on a payment for, say, a car loan or student loan.

What is used to calculate my DTI?

Your DTI is calculated by dividing the total amount your pay each month toward debt payments by your total gross monthly income.

Do all lenders have the same DTI requirement?

There is no standard DTI requirement for lenders. Typically, a DTI of 43% is the highest DTI will accept for a mortgage. Some personal loan companies, however, may have more lenient requirements and may be willing to lend money to consumers with higher DTIs.

(1) “Verified Income” is income Intuit verified you filed with the IRS through us and which we accessed with
your consent.

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