Calculate Your Debt To Income Ratio: How Much Debt Do You Have?

by Millie Kay G. on 2009-01-2920

Do you have too much credit card debt? How can you get great mortgage loan rates? Can you afford a house? To answer these questions, you can evaluate your debt load by figuring out your debt to income ratio.

When I hunted for a mortgage several years ago, I was required to assess my debt to income ratio, which represents how much I owe on my credit cards and other loans versus my monthly income.

Having too much debt can make it more difficult to get financing, so it’s worth it to take the time to study the numbers every so often. It’s something I try to do once in a while to make sure I’m not going overboard with what I owe.


Thankfully, sites like Bankrate.com are around to help us with determining the factors we need to help us with these calculations. So here are the steps I’ve taken to get a handle on my debt to income ratio as a benchmark for my debt load:

debt to income ratio, dog and bone
Debt management is a balancing act, just ask shutterclick.

How To Calculate Your Debt To Income Ratio

1. List your debts.

First, list the various debts held by members of your household:

  • Current monthly mortgage or rent paid
  • Any home equity loans you might have
  • Any car payments
  • Monthly credit card payments
  • Student loan payments
  • Other types of loans (like ones from the furniture store, boat loans, etc.)
  • Miscellaneous debts not listed above (like the $500 I borrowed from a relative during a medical crisis, which I divide by 12 to get the monthly payment amounts)
  • Other obligations like child support, alimony, etc (if applicable)

Then note the total amount of debt each month. It’s unnecessary to include your non-debt expenses like utilities or food in the debt to income ratio, though knowing the amount of your total expenses will hopefully help you stop overspending.

2. Note your income.

For income, list down the following:

  • Monthly take home pay (your paycheck minus the various deductions)
  • Your partner’s monthly take home pay
  • Miscellaneous monthly income (such as from eBay or other sales, if it’s regular income)
  • Monthly investment income (if you have it available)

Note the total monthly income amount.

3. Make the calculation.

Your total monthly debt divided by your total monthly income gives you the debt to income ratio. Or in other words:

Total Monthly Debt/Total Monthly Income = Debt to Income Ratio.

4. Check out your score.

Here’s the rule of thumb: a number of less than 30% is excellent; 30% to 36% is good, while 36% to 40% means you’ll have a harder time securing loans and you may run into trouble making payments.

So How Much Debt Do You Have? The Ratio’s Red Flag

And if the ratio is above 40%, we’d be in red flag territory. After all the coverage of the subprime mortgage problem, I’ve learned that it’s never a good idea to have more debt than we can handle; my goal has always been to make sure I work and communicate with the rest of my family to reduce our total debt as quickly as possible.

Our strategy has been to reduce our debt load and whatever we can’t eliminate, we try to work out a better interest rate for those loans. There are many ways to make debt reduction work: we’ve tried lowering our interest rates by performing balance transfers. Some other strategies include trying to get rid of our debt by eliminating our high interest debts first. We then recalculate the ratio to see if we’ve reduced it enough. For those high interest debts that are too massive to reduce at a fast pace, we’ve tried to pay off the smaller loans first; it’s the best we can do even if we end up paying more interest in the long run. Here are some additional debt elimination tips we follow.

how much debt do you have, dog cookies
How much debt should we carry? Image by shutterclick.

Improving The Debt To Income Ratio for Better Borrowing

In addition, I’ve been trying out ways to increase my income — I’ve looked into taking on a part-time job, I’ve checked out freelancing and odd jobs, and have been selling my craft goodies online. Right off the bat, I can think of ways to cut my non-debt expenses like groceries, clothing, entertainment, and my big money sink: gifts!

Note, though, that the best time to calculate your debt to income ratio is before you buy a house. It’s used to help you get better home loan rates and qualify for a mortgage loan or some other loan. So if you want to move to another neighborhood and take on a bigger mortgage, you should study your numbers to see if adding more debt would affect the ratio negatively. This means you shouldn’t take on a $1600 a month mortgage if the jump would make your other debts harder to pay.

It’s been pretty easy for me to work out these calculations for my family’s finances. I’ve been able to pull the necessary numbers to compute my household’s ratio from financial tools such as Quicken, Mint and YNAB (You Need A Budget) personal budget software, which I then plug into a debt to income ratio calculator.

Staying in good financial shape doesn’t take a lot of arcane calculations. By keeping an eye on your debt to income ratio, you’ll find it more of a breeze to apply for your next big loan.

Copyright © 2009 The Digerati Life. All Rights Reserved.

{ 15 comments… read them below or add one }

JVG Consult January 30, 2009 at 5:10 am

The problem a lot of people are having right now is how to keep that income.

Miss M @ M is for Money January 30, 2009 at 11:22 am

I went from a D/I of 55% to under 30% over the last 2-3 years. I was even able to refi my house at that high debt load since I had great credit, I wonder if lenders are still that loose. I changed my ratio by greatly increasing my income and paying off a huge credit card balance, car loan and student loan. I’m finding life much more pleasant at 30%!

tom January 30, 2009 at 11:31 am

I think the problem also lies with people buying stuff on credit.

I mean really, what are you going to do when you make 50K and your car is worth 30k? You don’t have the funds to cover the full price.
Same deal with the house.
Stop buying this stuff on margin, and then become a slave to it for the next few or many years, just trying to keep it by paying the bills

Silicon Valley Blogger January 30, 2009 at 11:32 am

Miss M,

Yes, I like how some calculations can help us get peace of mind by giving us a quick look at our debt load — and it’s pretty easy to see what needs to be adjusted to change that ratio. Lower the ratio by lowering the debt or increasing the income or do both. It should be everyone’s goal to get that ratio down. Right now, our ratio is higher than it used to be because our income is lower than it’s ever been over the last 5 years (while our debt has remained steady since we only owe on our mortgage), but I think we’re getting there as we strive to improve cash flow.

Manshu January 30, 2009 at 12:50 pm

I am at 0%, have been for the last five years or so. Bought a car with my savings and never gave in to the temptation of buying a house during the boom.

djc January 30, 2009 at 1:40 pm

@Manshu – according to the MSN calculator, you couldn’t be at 0% if you make a rent payment. Rent or mortgage costs are included.

We have two incomes, no consumer debt or car payment, just the mortgage, property taxes and insurance, which puts us at an “acceptable” debt ratio of 22%, according to the calculator.

Manshu January 30, 2009 at 3:34 pm

@DJC – Thanks for pointing that out. I don’t think I’ll include an advance payment in my debt :) – its a credit, not a debit – but that’s just me. I really didn’t go to the calculator. I was just thinking in terms of people or companies I owe.

Pace January 30, 2009 at 6:09 pm

Very good explanation of the debt to income ratio. Your readers might be interested to know that if they try to qualify for a loan under The Housing and Economic Recovery Act of 2008 they must have a debt to income ratio below 31%.

Start-Up January 30, 2009 at 7:11 pm

I recently purchased a condo and would not have been able to secure a mortgage if I had a low credit score and/or a high D/I ratio. Prior to buying my condo I only had car payments, and my credit score was above 700. I still found it to be quite the run around to prove that I came up with 20% on my own. I had to show proof of CD transfers, income statements, bank statements for three months. All of this was after I was pre-approved for a 300,000 mortgage. I only borrowed 220,000. So to answer your question Miss M, no I don’t think lenders are still that loose.

John Glick January 31, 2009 at 7:49 pm

Great blog. Have you heard of Wesabe.com? It’s an online group of money-wise people who share information about managing money. A free Wesabe membership allows you to participate in all Wesabe community features like tips and discussions. For example, there are discussion groups about “How much should I have in an Emergency Fund?” and “What are ways of tracking saving?” As you mentioned, the other way to improve your debt/income ratio is to increase your income!

Silicon Valley Blogger January 31, 2009 at 8:17 pm

Thank you John,

Glad you brought up Wesabe!

We do discuss both Mint and Wesabe here, as well as many other financial tools. Please feel free to poke around our site’s archives (or try our search box) for discussions and coverage on these tools and applications.

Yes I agree that Wesabe has awesome community features! I do visit their forums regularly and sometimes share the information I get from there with our readers here.

Arpita Barua May 26, 2009 at 8:22 pm

As Manshu I am also at 0%. Thanks for this nice article. You have pointed here some important factors relevant to debt. I think when you are trying to get out of debt, and protect your credit as much as possible; debt settlement can be the most economical option for you.

You can check one valuable site:
http://www.debt-to-income.com/

Cheap Living June 15, 2009 at 1:23 am

Years ago, people saved up to buy things. Today, it seems like everyone wants everything right away. I’ve always been frugal and have never been in debt (except for a mortgage). And, it’s not because I make a large income, either (family income has never been higher than 45K). The best way to manage debt is to avoid it as much as possible. My philosophy is: Only borrow money for emergencies or investments. Anyway, that’s my 2 cents worth. :-)

Dr. Write off Debt October 12, 2009 at 3:15 pm

I have been told that there is good debt and bad debt. But nothing tastes as good as NO Debt! Be ye transformed!

sudhanshu December 22, 2010 at 11:45 am

Accept the fact you are in debt and forgive yourself.

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