Debt-to-Income Ratio (DTI) is an important financial metric that lenders use to evaluate a borrower’s ability to manage additional debt. It is dividing the borrower’s total monthly debt payments by their gross monthly income. This ratio provides lenders with an indication of how much of the borrower’s income is already allocated towards obligations Debt-to-Income Ratio indicates that the borrower has more disposable income and is less to default on theirs. Lenders typically have specific requirements for loan approvals, with lower ratios being more favorable.
A lower DTI indicates that a borrower has a good balance between debt and income. In general, lenders prefer a DTI ratio of 36% or less, although some loans may allow for higher ratios. A higher DTI ratio suggests that a borrower may have difficulty managing monthly payments, increasing the risk of default.
When calculating DTI, lenders consider various debts, including credit card payments, car loans, student loans, and other financial obligations, in relation to the borrower’s income.
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