How is the debt-to-income ratio defined?

The debt-to-income ratio (DTI) is defined as the total monthly debt payments divided by gross monthly income. This financial metric is important for lenders when evaluating a borrower's ability to manage monthly payments and repay debts. A lower DTI indicates that a borrower has a good balance between income and debt, which can be favorable when applying for loans or mortgages.

This ratio provides insight into an individual’s financial health, helping lenders to assess risk. It compares the total recurring monthly debts—such as mortgage payments, car loans, credit card payments, and other obligations—to their total monthly income before taxes. A higher DTI may suggest that a borrower is over-leveraged and may struggle to make payments on new debt.

The other choices do not accurately capture the definition of the debt-to-income ratio. The second option focuses only on housing expenses and does not include other types of debt; the third option describes a calculation that does not represent the DTI, and the fourth option relates to savings rather than debt obligations. Therefore, the correct definition of the debt-to-income ratio is the total monthly debt payments divided by gross monthly income.