Debt-to-income ratio, or DTI, is a financial measure that compares your monthly debt payments to your monthly income. It is used by lenders, landlords, and other organizations to assess your creditworthiness and determine whether or not to extend you credit or approve you for certain products or services.
Your DTI is calculated by dividing your total monthly debt payments by your total monthly income. For example, if you have monthly debt payments of $1,000 and monthly income of $4,000, your DTI would be 25%.
There are two types of DTI: front-end DTI and back-end DTI. Front-end DTI looks at your housing expenses (such as mortgage or rent payments) as a percentage of your income, while back-end DTI looks at all of your debt payments (including housing, credit card debt, student loans, and other debts) as a percentage of your income.
Lenders and other organizations use DTI as a way to determine how much of your income is being used to pay off debt, and how much is available to cover other expenses. A lower DTI is generally considered to be more favorable, as it indicates that you have more disposable income and may be less likely to struggle to make your monthly debt payments.
That being said, DTI is just one factor that lenders and other organizations consider when making credit decisions. They may also look at other factors, such as your credit score, credit history, employment history, and assets.
It’s a good idea to keep an eye on your DTI and try to maintain a healthy balance between your debt and income. By paying off your debts and reducing your monthly debt payments, you can improve your DTI and make it easier to get approved for credit and other financial products.