When lenders evaluate how large a loan they can approve for you, they rely on various metrics. DTI, which stands for debt-to-income ratio, is one of them. While the formula is simple, it often has the final say.
How to calculate your DTI
DTI=Total monthly debtGross monthly income100%
In the total monthly debt include all recurring payments: housing loans, car financing, credit cards, personal loans, and even alimony. Don’t add utilities, groceries, or other living expenses that aren’t debts.
For example, if you earn ₱50,000 monthly and pay ₱12,000 for a car loan, ₱5,000 for a credit card, and ₱3,000 for a personal loan, your total monthly debt is ₱20,000. Your DTI then is:
DTI=₱20,000₱50,000100=40%
There are two types of DTI:
- Front-end DTI covers only housing costs, such as rent or mortgage; ideally at or below 28%.
- Back-end DTI includes all debts and should stay below 36% for most loan approvals.
What is considered a good debt-to-income ratio in the Philippines?
Lenders prefer back-end DTI around 30-40%. At this level, you’re seen as low-risk and qualify for better interest rates and higher credit limits. For mortgages, lenders want DTI under 35% because housing loans are long-term commitments.
A DTI between 40-50% raises concerns — you’ll face more scrutiny and possibly higher rates. Above 50%, most banks will reject your application, as it signals you’re overextended. When most of your income goes to debt payments, you have little buffer for emergencies or unexpected expenses.
Tools to track and improve your DTI
Before sending an online banking application, you can assess your chances using the formula above. Then, you pass the responsibility to a financial institution you plan to borrow from — it may be a traditional bank or a fintech company. The latter is more flexible and oftentimes offers lower annual fees and a longer grace period. Regardless of which lender you choose, they’ll do their research and let you know whether you’re eligible for their loan products or not.
Practical ways to lower your DTI
- Pay down high-interest debts first using the avalanche method or snowball method.
- Increase your income through side hustles or a raise.
- Avoid taking on new debt until your DTI drops below 36%.
- Consider refinancing existing loans if you can get a lower rate or longer term that reduces monthly payments.
- Track your DTI regularly using a simple spreadsheet or banking app.
Your debt-to-income ratio is one of the most important numbers in your financial life. Keep it low, and you’ll have more options, better rates, and less stress about money.
