Debt to Income Ratio (DTI)
What is the ratio
Debt to Income (DTI)
How is it calculated?
Fixed Obligations (Loans + Rent) / Gross Income
Goal of the Ratio
The goal of this ratio is to show how much of a person’s income is required to make their debt payments. This ratio is used a gauge to determine how easily a borrower can afford a their current as well as proposed payments.
When is it used?
Consumer loans or when analyzing a guarantor
Rules of Thumb
Lower is Better (as either loan payments decrease or income rises, the risk goes down). Most banks want to see a ratio of 40% or less. Some banks take it a step further and require that the housing cost portion of the DTI not exceed 29% and the non-housing debt portion not exceed 11%.
What changes in DTI could mean:
- Change in Loan Payments
- Change in Interest Rates
- Change in Income Levels
Other Relevant Terms
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