What is a debt-to-income (DTI) ratio, and why is it significant?

The debt-to-income (DTI) ratio is a critical financial metric that measures a borrower's monthly debt payments as a percentage of their gross monthly income. This ratio is significant because it helps lenders evaluate a borrower's ability to manage monthly payments and repay debts. A lower DTI ratio typically indicates that a borrower has a manageable level of debt relative to their income, making them a more attractive candidate for a mortgage or loan. Conversely, a higher DTI ratio may suggest that a borrower could face difficulty in meeting their debt obligations, which could impact lending decisions.

Understanding the DTI ratio is essential for both borrowers and lenders. For borrowers, knowing their DTI can help in budgeting and understanding the limits of what they can afford in terms of debt. For lenders, the DTI ratio serves as a relevant criterion in underwriting decisions, influencing the approval of loans and the terms that may be offered.