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Debt-to-Income Ratio

Debt-to-Income (DTI) ratio compares an individual or household's total debt to their gross income. Lenders and financial institutions use DTI to assess a borrower's ability to manage and repay debt obligations.

What You Need To Know

The DTI ratio is calculated by dividing the total monthly debt payments by the gross monthly income. The formula is: DTI Ratio = (Total Monthly Debt Payments / Gross Monthly Income) x 100. Total monthly debt payments are typically include recurring obligations such as mortgage or rent payments, credit card debt, student loans, car loans, and other outstanding debts.

There are 2 main types of DTI ratios: the front-end ratio and the back-end ratio. The front-end ratio focuses only on housing-related expenses, including mortgage payments, property taxes, and insurance. The back-end ratio takes into account all recurring debts, including housing expenses.

Lenders use the DTI ratio to assess a borrower's ability to handle additional debt. A lower DTI ratio indicates that a borrower has a lower level of debt relative to their income, suggesting they have more financial capacity to take on additional debt. A high DTI ratio may result in loan denial or require additional documentation and explanation from the borrower to demonstrate their ability to handle the loan payments.

There is no universal DTI ratio limit that applies to all lenders, as different institutions may have varying requirements. However, a commonly used benchmark is a DTI ratio of 43% or lower for qualified mortgages under the guidelines set by the Consumer Financial Protection Bureau (CFPB).