Everyone talks about the importance of your credit score — but your debt-to-income ratio (DTI) may be just as important, Broke Millennial: Stop Scraping by and Get your Financial Life Together author Erin Lowry says.
She explains why.
WHAT IS DEBT TO INCOME RATIO & WHY IS IT IMPORTANT?
"Why this matters is because it actually really gives you a sense of how much more debt, if any, you can handle," Erin explains.
In other words, DTI is a key factor lenders use to decide whether or not to give you a loan.
"Lenders care a lot about it," the personal finance expert says. "Of course your credit score is important, but this is important, too."
HOW TO CALCULATE DTI
Debt-to-income ratio (DTI) = (Monthly debt / Monthly gross income) x 100
Let's break that down.
Monthly debt: "It's not your total debt," the Broke Millennial author says. It's student loans, car loans, your mortgage, or balances on credit cards that you're paying off in monthly installments.
Monthly gross income: Your monthly income before taxes, healthcare costs and retirement contributions are taken into account.
WHAT IS A GOOD DTI?
"If it comes out at 20% or less, you're doing pretty well. It's kind of like having a 700 credit score. You're looking good. If you're at 40% or higher, it might be a little bit of a red flag."