A debt-to-income ratio (DTI) is a personal finance metric that compares the total amount you owe each month to your overall monthly income. Specifically, DTI looks at debt payments in relation to gross monthly income (income before taxes/deductions).
DTI is expressed as a percentage and gives a snapshot of a person’s ability to manage debts and repayments while meeting living expenses. It is an important factor lenders use to determine loan approval eligibility.
Understanding DTI
- Indicates how much income goes towards debt repayment vs meeting living costs
- Helps determine additional debt repayment capacity
- Key factor for lenders in deciding on loan approvals
- Indicates financial health – the lower the better for individuals
- Used widely in mortgage lending decisions
Formula to Calculate DTI
Monthly debt payments Monthly gross income
For example, if monthly debt payments total $2,000 and gross monthly income equals $7,500, the DTI is:
$2,000 / $7,500 = 0.27 or 27%
Significance of DTI for Lenders
Lenders prefer reviewing DTI to understand borrowers:
- Debt load: Higher ratios indicate larger debt burden
- Loan repayment capacity: Lower ratios demonstrate ability to handle further loans
- Risk appetite via spending patterns: High ratios reflect stretched budgets
DTI levels preferred by lenders:
- Mortgages: Below 36%; approve manually up to 50%
- Personal loans: 30 to 40% ideal
- Auto loans: 10 to 15% considered safe
Debts Included in DTI Computation
Common debts covered
- Housing loans EMIs
- Credit card dues
- Auto/vehicle loans
- Personal & consumer loans
- Student loans
- Alimony/child support
Debts not included
- Utility bills
- Insurance premiums
- Daycare/medical expenses
- Food, fuel and travel
- Rent payments
How to Improve Your DTI
Consumers can lower their DTI by:
- Paying down high-interest debt
- Consolidating multiple loans
- Extending auto or personal loan tenures
- Looking for higher earnings/overtime
- Reducing unnecessary expenses
Average U.S. Household DTIs
| Year | DTI Percentage |
| 2019 | 37% |
| 2020 | 39% |
| 2021 | 42% |
| 2022 | 44% |
The average household DTI has climbed up continuously since the COVID pandemic due to rising debts, living costs and economic uncertainty.
Ideal DTI Range
- <20% – Excellent
- 20-35% – Very Good
- 35-49% – Caution
- 50% – Risky
Higher ratios above 35% make it difficult to qualify for loans or credit. Below 20% shows strong financial fitness.
DTI Landscape in India
- Indian lenders gaining awareness, but DTI not commonly used presently
- Mostly relied upon in high value real estate loans above Rs 50 lakhs
- NHB caps DTI for housing loans at 50% of net monthly income
- RBI studying DTI applicability for retail loans under Rs 25 lakhs
- Fintechs and new age lenders driving DTI based lending models
- Use machine learning algorithms on credit bureau data for DTI based approvals
- Enable customized loan offerings based on income streams and existing DTI
- DTI gains more relevance amidst rising household leverage ratio from 20% in 2015 to 40% in 2022
- Calls for responsible lending guidelines covering DTI along with EMI and LTV ratios.
DTI Ratio Impact on Indian Markets
- Higher household DTI curbs overall consumer demand and spending power affecting industries
- Non-banking financial companies witness risk of defaults and bad loans increase with high DTI borrowers
- Stretched household budgets unable to absorb further interest rate hikes or cost inflation
- Housing and auto sector sales affected as high DTI borrowers defer or downgrade purchases
- Fintech lenders reshaping products and using new data sources to provide loans to higher DTI segments
- Insurers and investment companies modify product features for low DTI individuals
- India’s average household debt to GDP ratio rose from 9% in 2014 to 16% in 2022
- Calls for financial literacy and advisory on prudent use of leverage, avoiding over-indebtedness.