What is a debt-to-income (DTI) ratio?

The debt-to-income (DTI) ratio is specifically defined as a measure of a borrower's monthly debt payments compared to their gross monthly income. This ratio is a crucial factor that lenders consider when evaluating a borrower's ability to manage monthly payments and repay debts.

A lower DTI ratio indicates that a borrower has a good balance between debt and income, making them less risky to lend to. In contrast, a higher DTI ratio may suggest that a borrower is over-leveraged and could potentially struggle with loan repayments, which is why lenders scrutinize this figure closely during the mortgage application process.

Understanding the DTI ratio is essential for borrowers, as it plays a significant role in determining loan eligibility and the terms of financing. By focusing on their income levels relative to their debt obligations, borrowers can make informed decisions about taking on additional loans or credit.