Background

• Debt-to-income ratio, sometimes called back-end ratio, shows as a percentage of debt relative to a person's overall income. These ratios can never be lower than zero or higher than 100. For example, a person with a debt-to-income ratio of 47.7 has debts amounting to 47.7 percent of his income. Typically, all debts, including student loans, mortgage payments, car loans and credit cards, factor into the debt-to-income ratio, although some lenders exclude a person's mortgage debt from the equation.
  
  

Function

• Lenders often use a person's debt-to-income ratio to determine his eligibility for loans or credit. In fact, according to the consumer finance website Bankrate.com, debt-to-income ratio is as important as credit score in determining whether someone is eligible to receive home or auto financing, credit cards or other forms of credit. Additionally, individuals can use their debt-to-income ratios to manage household spending and create personal debt payment budgets.
  
  

Ideal Number

• Typically, individuals should keep their debt-to-income ratios below 36 percent, the maximum number at which lenders are willing to extend credit. Having a number above 36 percent means being denied credit or paying exorbitantly high interest rates. Additionally, the Federal Reserve considers individuals with debt-to-income ratios above 40 percent to be in "financial distress," says an article from MSN Money. However, there is no minimum ideal number for debt-to-income ratio: someone with a debt-to-income ratio of zero percent will not see any adverse impact on his abilities to obtain credit.
  
  

Considerations

• Although debt-to-income ratio is an important financial metric, it does not show up on a person's credit report or affect an individual's credit score. However, in addition to personal money management and budgeting reasons, individuals should be aware of their debt-to-income ratios for bargaining purposes during the loan negotiation process. Borrowers can use a good debt-to-income ratio to convince lenders to give them lower interest rates or more favorable loan terms.