Why Lenders Care About Your Debt-to-Income Ratio
Your debt-to-income ratio, also called DTI, is a calculation that determines the percentage of your gross income that goes towards paying off your debts.
Your debt-to-income ratio is important because lenders use it to determine which potential borrowers can afford to pay them back in the agreed-upon time and as a precaution so that borrowers are not financially overextending themselves. Such as, lenders use your DTI to approve or deny borrowers who apply for loans, such as mortgages, car loans, or personal loans. Typically, a lender looks for a DTI of 36% or lower, with no more than 28% of the loan amount going towards rent or mortgage payments.
DTI is calculated by adding up all of your monthly payments of credit cards, mortgages, and other debts and dividing that total number by your monthly gross income.
An example of a debt-to-income ratio calculation is below.
Based on the example, the borrower would be approved for a loan since their DTI does not exceed 36% and their mortgage payment does not exceed 28%.