How Much Debt is Too Much Debt?

Q: How much debt is too much?

A: One way to assess your level of debt is by calculating your debt-to-income ratio (DTI). Your DTI is the percentage of your gross monthly income dedicated to paying debts. In addition to determining whether you can afford a loan such as a mortgage, your DTI can directly influence your credit and your ability to borrow money.

The two main types of DTI are the front ratio and the back ratio.

The front ratio specifies the percentage of income dedicated to housing costs
The back ratio specifies the percentage of income dedicated to all recurring debt payments, including housing and any additional debts such as credit card payments or car loans.

For mortgage loans in the United States, conventional financing limits are generally 28 percent for the front ratio, and 36 percent for the back ratio: a DTI of 28/36.

For example, a person who has a yearly gross income of $60,000 would calculate her DTI ratio as follows:

Yearly gross income: $60,000
Monthly gross income: yearly gross income divided by 12 = $5,000
Front ratio: $5,000 multiplied by 0.28 = $1,400
Back ratio: $5,000 multiplied by 0.36 = $1,800

In this example, to qualify for a mortgage for which the lender requires a DTI of 28/36, this person's monthly housing expenses cannot exceed more than 28 percent of her monthly income: $1,400.

Her monthly housing expenses plus recurring debt cannot exceed more than 36 percent of her monthly income: $1,800.

A high debt ratio is a red flag that your monthly expenses are becoming unmanageable, and can hinder your ability to qualify for loans. Being familiar with your DTI and managing your debt is crucial to your ability to afford a mortgage, borrow money and manage your credit.

Still too much debt? Visit Debt Freedom Tips for more information.

(If your operating system does not support using a Print button, simply use your Web browser's "Print" command instead.)

How Much Debt is Too Much Debt?

Q: How much debt is too much?

Evaluate Your Debt