Debt-to-income ratio (DTI) is a financial measure that compares an individual’s or organization’s total debt payments to their gross monthly income. The DTI is calculated by dividing the total amount of debt payments (including mortgage, car loans, credit card debt, and other debt obligations) by the individual’s or organization’s gross monthly income.
For example, if an individual has a total debt payment of $2,000 per month and a gross monthly income of $5,000, their DTI would be 40% ($2,000 ÷ $5,000 = 0.4).
The DTI is used by lenders and financial institutions to assess an individual’s or organization’s ability to manage debt and make timely payments. In general, a lower DTI indicates that an individual or organization has a more manageable level of debt, while a higher DTI may indicate that they are at a greater risk of defaulting on their debt payments.
Lenders may use different DTI thresholds depending on the type of loan or credit product being applied for. In general, a DTI of 43% or lower is considered to be a good benchmark for most types of loans, but some lenders may require a lower DTI for more risk-sensitive loans, such as mortgages.