Definition
Debt-to-Income Ratio (DTI) is a financial metric that compares your monthly debt payments to your monthly gross income. Lenders use DTI to assess your ability to manage monthly payments and repay debts. A lower DTI indicates a healthy balance between debt and income, while a higher DTI suggests you may be overextended. Most lenders prefer a DTI below 43% for mortgage approval, with optimal ratios below 36%.
Formula
Total monthly debt includes mortgage/rent, car payments, credit card minimums, student loans, and other debt obligations. Gross income is your pre-tax income.
Example
DTI Calculation Example
If you have a $1,500 mortgage, $300 car payment, $200 student loan payment, and $150 in credit card minimums, your total monthly debt is $2,150. With a gross monthly income of $6,000, your DTI would be 35.8% ($2,150 ÷ $6,000). This is within the acceptable range for most lenders.