If you’ve ever thought about buying a home, refinancing a loan, or getting approved for a credit card, you’ve likely come across the term “debt-to-income ratio,” or DTI for short. But what exactly is DTI, and why does it play such an important role in lending decisions? Let’s break it down in a simple, straightforward way.
What Is Debt-to-Income Ratio?
Your debt-to-income ratio is a measure that compares the amount you owe each month to your monthly income. In other words, it’s a measure lenders use to see how much of your income goes toward paying debts.
To calculate your DTI, lenders add up all your monthly debt payments — like credit cards, student loans, car loans, and any other debts — and then divide that total by your gross monthly income (the amount you make before taxes and deductions). The result is a percentage that tells lenders how much of your earning power is alr...
