What is a Debt-to-income ratio?

Debt-to-Income Ratio (DTI)

The Debt-to-Income ratio (DTI) compares total monthly debt payments to gross monthly earnings, revealing how much of one’s paycheck goes toward obligations. Commonly expressed as a percentage, it helps lenders or investors judge whether an individual or entity has enough disposable income to handle new loans without straining existing commitments.

Key Points

• Calculation: (Monthly debt payments ÷ Monthly gross income) × 100 = DTI.
• Thresholds: A lower DTI implies stronger financial health and less default risk.
• Approval Impact: Many lenders set maximum DTIs to ensure affordable repayments.
• Short-term Fluctuations: Changing incomes or new debts can adjust DTI frequently.

Monitoring this ratio assists in prudent financial planning. Borrowers must manage DTI levels to maintain flexibility, secure better interest rates, and avoid overextension.