debt-to-income ratio
A personal finance measure that compares monthly debt payments to gross monthly income, used by lenders to assess borrowing capacity.
Example
“With $2,000 in monthly debt payments and $6,000 in income, his DTI was 33%, below the 43% mortgage threshold.”
Memory Tip
DTI = Debt divided by Income. Lower is better — lenders want it under 43%.
Why It Matters
Your debt-to-income ratio directly affects your ability to borrow money for major purchases like homes or cars. Lenders use this metric to determine whether you can responsibly take on additional debt, making it a critical factor in whether you qualify for loans and what interest rates you will receive.
Common Misconception
Many people believe that having any debt automatically gives them a high debt-to-income ratio, but the ratio only measures your monthly debt payments relative to income. You can have substantial debt and still maintain a healthy ratio if your monthly payments are manageable compared to what you earn each month.
In Practice
If you earn $5,000 gross monthly income and have $1,200 in monthly debt payments including a car loan, student loans, and credit cards, your debt-to-income ratio is 24 percent. Most lenders prefer this ratio to stay below 36 to 43 percent, so in this case you would be in a strong position to take on additional borrowing like a mortgage.
Etymology
Plain English financial ratio — debt divided by income.
Common Misspellings
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See Also
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