The debt-to-income ratio (DTI) is a financial metric that helps assess a person’s ability to manage their debt relative to their income.
It’s calculated as:
Where:
- Total Monthly Debt Payments include obligations like mortgage, credit card payments, car loans, etc.
- Gross Monthly Income refers to your income before taxes or deductions.
Example:
If your total monthly debt payments are \$1,500 and your gross monthly income is \$5,000, the DTI is calculated as:
Key Points:
- A lower DTI (below 36%) is generally considered favorable by lenders.
- A higher DTI might indicate higher risk and can make it harder to qualify for new loans.