The Debt-to-Income Ratio (DTI) is a crucial financial measure that lenders use to assess a borrower’s capacity to handle additional debt. It is calculated by dividing the borrower’s total monthly debt payments by their gross monthly income. This ratio helps lenders determine how much of the borrower’s income is already committed to existing obligations. A lower DTI suggests that the borrower has more disposable income and is less likely to default on a loan.

Lenders typically have specific criteria for loan approvals, favoring lower DTI ratios. Generally, a DTI of 36% or less is preferred, though some loans may permit higher ratios. Conversely, a higher DTI may indicate that the borrower could struggle with monthly payments, thereby increasing the risk of default.

When determining DTI, lenders consider various debts, such as credit card payments, car loans, student loans, and other financial obligations, relative to the borrower’s income.