Your debt-to-income ratio (DIT) compares how much you owe each month to how much you earn. Basically, anyone who wants to qualify for any loan will have their DIT checked. It tells the lender if you can make regular payments. Let’s break it down!
Gather your checkbooks, bills, and bank account summaries because it’s time to do some math. Start by adding up all of your minimum monthly payments. It includes rent, credit/debit cards, car payments, student loan payments, etc. Do not include utilities, cable, wifi, phone bills, insurance, or groceries.
Then, take that number and divide it by your yearly income before taxes. It includes salary, tips, pension, social security, child support, alimony, etc. The number you get after dividing is your DIT percentage.
Don’t want to do the math? Use this calculator provided by IAW’s partner Laurel Road.
What does your percentage mean?
50% or more
Generally, this higher percentage means you have some work to do on your personal finances before you can get the loan you want. While there are lenders who will give loans to higher percentages, you may not get the best loan or percentage of interest. Before opting for a loan, evaluate your current costs and the risks associated with an additional loan at a higher interest rate.
43% or less
A lower forty percent means you are headed in the right direction with your DIT ratio. The Consumer Financial Protection Bureau previously recommended a 43% maximum for a qualified mortgage before changing to price-based thresholds. For those refinancing student loans, this range is recommended for a lower interest rate.
36% or less
Congrats! This percentage range offers lower interest rates on student loans and is the CFPB recommended for mortgage borrowers!
20% or less
Amazing! Your score is in the lowest range for DIT which means it is the best possible ratio for loans.
How does it affect loans?
Lenders use your DIT percentage alongside other scores to decide if they will give you the money. The higher your percentage, the riskier you are to give a loan. The rule of thumb is that a lower percentage gives you the best opportunities. However, if your DIT is high, but your credit score is good then you may still qualify for a loan. For example, physicians with a lot of debt who have a high DIT ratio but a good credit score and history can still receive a mortgage with Laurel Road.
Laurel Road isn’t only a mortgage provider for physicians. They help every individual find the right online banking, lending and refinancing options for them. That’s why the International Association of Women partners with them and other world-class organizations to offer our members access to incredible resources and support. Just as our members build skills through shared knowledge, IAW works with its partners to develop lasting relationships. If you are interested in supporting women’s growth globally, then partner with the IAW at https://www.iawomen.com/partners