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Your debt-to-income (DTI) ratio is a personal finance measure that compares your overall debt to your overall income. To calculate it, you divide your recurring monthly debt payments by your monthly gross income. The resulting number is expressed as a percentage.
Lenders use this percentage to assess your ability to manage monthly payments and repay the money you want to borrow from them. Ultimately, it helps lenders determine how much money they’re willing to lend you.
The lower your DTI ratio, the more likely you are to receive the loan amount you want because your low DTI ratio illustrates a good balance between debt and income (essentially, you don’t spend more than you can afford). Low DTI numbers typically indicate to lenders that you as a borrower are more likely to successfully manage your monthly payments with a new loan debt.
A higher DTI ratio could be a red flag for lenders because it means you have too much debt for your income. To the lender, this means you may not be as able to meet the additional financial obligations from a new loan. Many lenders don’t approve big loans for borrowers with high DTI ratios for this reason.
For the sake of your financial health, it’s crucial to keep your DTI ratio as low as possible. Determining your personal DTI ratio has never been easier – just use our simple debt-to-income calculator to quickly discover yours. While you can’t plan for the unexpected, knowing your financial status ahead of time can pave the way to a smoother borrowing process.