Debt to Income Ratio: Can You Really Afford That Car or Home?

She explained that your debt to income ratio, or “DTI” is the total of all your monthly debt payments divided by your monthly gross income. This number, which is a percentage, is used to determine lending limits by banks for big-ticket purchases – typically houses and cars.

How to calculate your debt to income ratio:

Calculating your debt to income ratio isn't overly complicated, the simple formula is: DTI = total monthly debt payments/gross monthly income.

How to fix your debt to income ratio: 1 – Line up Debt

First, line up your debt and come up with a plan to pay off the smallest debt payment ASAP. Paying off a $100 minimum payment could be the 4-8% you need to land lending.

2. Cut Up Credit Cards

Cut up your credit cards and stop using plastic (if applicable) to help you avoid taking out more debt. If you're credit cards are paid off, simply cancel your cards.

3. Assess transportation costs.

Ideally, you want your car to be valued at no more than 25% of your annual gross income. Another way of looking at it is to make sure only 10% of your monthly budget goes towards transportation.

4 – Refinance Student Loans

If you're looking to get lending and improve your debt to income ratio quickly, you should consider refinancing your student loans.

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