What does the debt-to-income (DTI) ratio compare?

The debt-to-income (DTI) ratio is a critical measurement used to evaluate a borrower's ability to manage monthly payments and repay debts. It specifically compares a borrower's total monthly debt payments, which include obligations such as mortgage payments, credit card payments, car loans, and any other recurring debt, to their gross monthly income, which is the income earned before any taxes or deductions.

This ratio is essential for lenders in determining the risk associated with lending to a borrower. A lower DTI indicates a borrower has a manageable level of debt relative to their income, reducing the risk for lenders, while a higher DTI suggests a potential financial strain that could lead to difficulties in maintaining loan payments. Therefore, understanding DTI allows lenders to assess the borrower's financial health more accurately.