How to lower your debt-to-income ratio

If you’ve ever been denied a loan due to a high debt-to-income ratio (DTI), you’re not alone. Many people find their DTI ratio standing between them and loan approval. The good news is that understanding how DTI ratio works is the first step to lowering it and improving your financial outlook.

Key Takeaways

• Your debt-to-income ratio (DTI) measures how much of your income goes toward debt and plays a major role in loan approval.
• A lower DTI ratio not only improves your chances of getting approved for loans but also helps you qualify for better loan terms and rates.
• You can lower your DTI ratio by paying down debt, increasing your income, refinancing, or consolidating high-interest debt.

Understanding the debt-to-income ratio

The debt-to-income ratio (DTI) measures how much of your monthly income goes toward paying off debt. Lenders use it to gauge your ability to repay a loan before issuing one.

Importance of DTI ratio in financial health

As a rule, the higher your DTI ratio, the greater the risk you present to lenders. Conversely, the lower your DTI ratio, the less risk you present. This is because your DTI ratio reflects how much you rely on your income to make monthly debt payments.

Most lenders require that your housing costs (including rent but minus any utility expenses) not exceed 28% of your gross income and that your overall debt (rent or mortgage payment plus any other loan payments) not exceed 36%.

Calculating your debt-to-income ratio

To calculate your DTI ratio, divide your total monthly debt payments by your gross monthly income and then turn the result into a percentage by multiplying by 100. Here’s the formula:

 (Total monthly debt payments ÷ gross monthly income) x 100 = DTI ratio

For example, if you make $10,000 per month and have $3,000 in monthly debt payments, your DTI ratio would be 30%. If you write out the formula using this information, it would be:

$3,000 (total monthly debt payments) ÷ $10,000 (gross monthly income) x 100 = 30%

What is a good DTI ratio?

DTI ratio standards vary by lender, but many consider a DTI ratio of 35% or less to be healthy. Meanwhile, DTI ratios of 36% to 49% may be adequate for a loan but require stricter terms, and 50% or more may limit your borrowing options.

Strategies to reduce your DTI ratio

If you’re concerned about your DTI ratio, here are some ways to lower it:

Paying down existing debt

You automatically lower your DTI ratio when you lower your debt. While easier said than done, proven strategies like the debt snowball or debt avalanche method can help you pay down your debt faster than you might think.

Refinancing loans

If interest rates have dropped since you took out your current loan(s), consider refinancing. Locking in a lower interest rate could reduce your interest costs, lower your monthly payment and DTI ratio, and help you pay off the loan faster.

The same applies if your personal finances have improved. For example, refinancing a car loan after boosting your credit score could help you secure more favorable loan terms that ultimately lead to a lower DTI ratio.

Debt consolidation

Another way to lower your DTI ratio is to consolidate debt. This means rolling multiple loans into one new loan, which could lower your interest rate and/or monthly payment. For example, if you have many high-interest credit card balances, debt consolidation into a personal loan with a lower interest rate could be a great option.

However, beware of debt consolidation scams that falsely promise to help lower your debt for an upfront fee and never do.

Increasing your income

The higher your income, the lower your DTI ratio (all else equal). While it may feel like your income is fixed, it’s not. Some ways to increase it include asking for a raise, getting a part-time job, or starting a side hustle. For example, the top side hustles in 2025 that require no experience include joining focus groups, working as a virtual assistant, testing websites, and walking dogs.

The role of credit utilization

Credit utilization refers to what percentage of your available revolving credit you use. For example, if you have one credit card with a credit limit of $5,000 and a balance of $1,000, your credit utilization would be 20% ($1,000 ÷ $5,000 x 100). The more you utilize your credit cards and run up higher credit card bills, the higher your payments to those credit card companies will be. When you use your credit cards in this way, you also impact your DTI ratio because your debt payments are higher.

Impact on credit score

Your credit utilization rate makes up 20-30% of your credit score. The lower your credit utilization rate, the higher your credit score. By using a smaller percentage of your available revolving credit, then, you can boost your credit score and make it easier to qualify for loans.

Long-term benefits of a lower DTI ratio

In the long run, maintaining a lower DTI ratio and a lower credit utilization rate by not maxing out your credit cards can improve your access to lower loan rates and better terms.

FAQ

How do I calculate my DTI ratio?

To calculate your DTI ratio, divide your total monthly debt payments by your gross monthly income. Then multiply by 100 to get a percentage.

What debts are included in the DTI ratio calculation?

DTI ratio includes recurring monthly debt obligations such as mortgage or rent payments, auto loans, student loans, and minimum credit card payments. It does not include discretionary spending like groceries, utilities, or streaming subscriptions.

Does my credit score affect my DTI ratio?

No, your credit score and DTI ratio are separate metrics. However, both play an important role in a lender’s decision to issue you a loan.

Can I still get a loan with a high DTI ratio?

Yes, but it may be harder to qualify, and you may be subject to stricter loan terms, such as higher interest rates and down payment requirements.

What is the difference between front-end and back-end DTI ratio?

Front-end DTI ratio measures just your housing-related expenses (like rent or mortgage), while back-end DTI ratio includes all monthly debt payments. Lenders typically have standards for each.

The bottom line: Lowering your DTI ratio requires financial diligence

While a high DTI ratio can keep you from qualifying for a loan with favorable terms, it’s only a short-term setback. You can improve your DTI ratio by boosting your income, lowering your debt, and refinancing or consolidating high-interest debt. 

Apply for a debt consolidation loan from Rocket Loans℠ today if you’re ready to learn more.