# Debt to Income Ratio - Explained

What is Debt to Income Ratio?

# What is the Debt-to-Income Ratio (DTI)?

Debt-to-Income Ratio (DTI) is calculated by dividing one individuals or company's debt payments by his or her or its total income over a specified period, expressed as a percentage.

## How is Debt-to-Income Ratio Used?

The DTI ratio concerns person or company's ability to repay its debt. The creditor, such as a mortgage lender, takes this figure into consideration when lending money. A lower DTI ratio indicates a good financial balance; while a higher ratio suggests one might having difficulty servicing the debt. In the DTI ration, the debt payment is calculated by adding up all the payments you need to make in a given period (generally monthly). The calculation includes the proposed loan amount. The gross income is your total earnings in the period before paying taxes and other deductions.

## Example of Debt to Income Ratio Calculation

Olivia pays \$400 for her auto loan, \$2,000 towards the mortgage and \$200 to repay all other loans in a month. Her recurring monthly debt is \$400 + \$2,000 + \$200 = \$2800. If her gross monthly income is \$8000, then her DTI would be \$2800/\$8000=0.35 or 35%.

## Additional Considerations for Debt-To-income Ratio

It is important to maintain a lower DTI in order to secure a loan from any institution. For example, generally, an institution allows up to 43% DTI while approving a mortgage loan. However, a DTI of less than 36 is preferred. Further, the cost of servicing a mortgage should not constitute more than 28% of the total debt. While the DTI maximum is not the same for all lenders, there is always a better chance of getting a loan or line of credit approved with a lower DTI.

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