Debt-To-Income Ratio: How To Calculate & Lower Your DTI

While credit scores matter, lenders also look at your debt-to-income (DTI) ratio to evaluate affordability. DTI shows how much of your income goes toward monthly debt payments and helps lenders assess repayment risk.

Below, we’ll explain how DTI works, how to calculate it, what lenders typically consider a good ratio, and practical ways to lower it before applying for a loan.

What Is The Debt-To-Income (DTI) Ratio?

The debt-to-income (DTI) ratio compares your recurring monthly debt payments to your gross monthly income. Lenders use it to evaluate whether you can realistically afford new loan payments based on your current financial obligations.

DTI is most commonly used in personal lending, particularly for mortgages. In small business lending, lenders usually rely more heavily on debt service coverage ratio (DSCR) to assess business cash flow.

That said, DTI still matters for sole proprietors and freelancers, since they aren’t legally separate from their businesses and don’t have a standalone DSCR. In those cases, lenders may use DTI to assess affordability and repayment risk.

Why Is The Debt-To-Income Ratio Important?

Your debt-to-income (DTI) ratio helps lenders determine two things: whether you can afford additional debt and how risky it would be to lend to you.

By calculating your DTI, you can see how much of your income is already committed to existing obligations and whether taking on another payment is financially realistic. A lower DTI generally improves approval odds, while a higher DTI can limit how much — or whether — you’re able to borrow.

Lenders may view a high DTI as a sign that your finances are stretched too thin, increasing the likelihood of rejection. A low DTI, on the other hand, signals stronger affordability and can lead to better loan terms, including lower interest rates or higher borrowing limits.

For small business owners, personal DTI can still matter. Even when lenders primarily rely on DSCR to evaluate business cash flow, they may review the owner’s DTI to assess overall risk and the ability to support a personal guarantee if required.

How To Calculate Your Debt-To-Income Ratio

To calculate your debt-to-income (DTI) ratio, divide your total recurring monthly debt payments by your gross monthly income. DTI is always expressed as a percentage.

Total Monthly Debt / Gross Monthly Income = DTI

But how do you determine your total monthly debt and gross monthly income?

What Is A Good Debt-To-Income Ratio?

In general, the lower your debt-to-income (DTI) ratio, the better. A lower DTI signals that you have enough income to manage existing obligations and take on new payments, which improves your chances of approval.

While acceptable DTI ranges vary by lender and loan type, these are common benchmarks:

• 36% or lower: Generally considered strong

• Up to 43%: May still be approved, often with less favorable terms

• Above 43%: Approval becomes more difficult, and lowering DTI is usually recommended before applying

DTI guidelines are often stricter in personal lending, but the same principles apply in small business financing when personal income is part of the approval decision. Checking lender-specific requirements and aiming for the lowest possible DTI can improve both approval odds and loan terms.

Using DTI To Determine If You Can Afford A Loan

Your debt-to-income (DTI) ratio doesn’t just affect approval — it can also help you estimate a realistic monthly loan payment.

Using the earlier example, your current DTI is 14%. If you want to stay within a conservative 36% DTI, that leaves 22% of your income available for a new loan payment.

To estimate an affordable payment, multiply your gross monthly income by that remaining percentage.

If your gross monthly income is $3,500:

3,500 x .22 = 770

This means you could afford a new loan payment of up to $770 per month while staying within a 36% DTI.

Knowing this number before speaking with a lender can help you set clear limits and avoid taking on more debt than your income can reasonably support.

How To Lower Your Debt-To-Income Ratio

Lowering your debt-to-income (DTI) ratio generally comes down to three levers:

• Increase income
• Reduce existing debt
• Borrow less

Increasing income can improve DTI, though it isn’t always immediately realistic. Reducing debt is often more practical — cutting unnecessary expenses and applying that cash toward outstanding balances can lower your ratio over time. In some cases, consolidating debt may also help simplify payments and reduce monthly obligations.

If you’re applying for a loan tied to a specific purchase, lowering the loan amount can also improve affordability by reducing the required monthly payment.

Improving DTI typically takes time, but even small changes can make a meaningful difference in your approval odds and loan terms.