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Debt-to-Income Ratio (DTI)
Definition
The percentage of monthly gross income that goes toward debt payments.
Explanation
DTI = (Total Monthly Debt ÷ Gross Monthly Income) × 100. Lenders use DTI to determine mortgage affordability. A DTI under 36% is preferred. Includes: proposed mortgage, car loans, student loans, credit cards. Excludes: utilities, groceries, insurance.
Lower DTI means more income available for housing. Paying down debts before buying a home can significantly improve your budget.
Example
$7,000 income, $1,700 existing debts = 24.3% DTI. Adding $1,960 mortgage = total $3,660, DTI = 52.3% (too high for most lenders).