📘 What is Debt-to-Income Ratio (DTI)?

Debt-to-Income Ratio (DTI) is a financial metric used by lenders to assess a borrower’s ability to manage monthly debt payments relative to their gross income. It's expressed as a percentage and reflects how much of your income goes toward debts.

Lenders use DTI to determine your creditworthiness and risk level when applying for loans, especially for mortgages and real estate investments.

📌 When and Why It’s Used

DTI is typically reviewed during the loan approval process to evaluate if a borrower can take on additional debt. A lower DTI signals financial stability and increases the chances of mortgage approval.

Most lenders prefer a DTI below 43%, though some programs may allow higher ratios with strong compensating factors like high credit scores or large down payments.

🧮 How It’s Calculated or Applied

To calculate DTI, divide your total monthly debt payments (including mortgage, credit cards, auto loans, etc.) by your gross monthly income. The result is multiplied by 100 to express it as a percentage.

There are two types: Front-End DTI, which includes housing expenses only, and Back-End DTI, which includes all debts.

✅ Pros

• Helps lenders assess borrower risk objectively
• Encourages borrowers to maintain manageable debt levels
• Useful for personal budgeting and financial planning

⚠️ Cons

• Doesn’t factor in living expenses or savings goals
• High DTI can limit access to financing even with good credit
• Not always reflective of a borrower's full financial picture