Understanding Debt-to-Income Ratio (DTI) and Its Impact on Your Finances

DTI stands for "Debt-to-Income Ratio". It is a measure of the amount of money that you spend on debt payments each month, compared to your gross income. It is calculated by dividing your total monthly debt payments (such as mortgage, car loan, credit card, and other debt payments) by your gross income.

For example, if you have a gross income of $50,000 per year and your total monthly debt payments are $2,000, your DTI ratio would be 40% ($2,000 / $50,000 x 12).

Lenders use DTI to determine how much risk they are taking on by lending you money. A higher DTI ratio indicates that you have a higher level of debt compared to your income, which can increase the risk of default. In general, lenders prefer to see a DTI ratio of 36% or less.

It's important to keep your DTI ratio low to ensure that you have enough money left over each month to cover your living expenses and save for the future. You can reduce your DTI ratio by paying off debt, increasing your income, or both.