Debt-to-income ratio (DTI) is a financial metric used to evaluate a borrower’s ability to repay their debts. It is calculated by dividing a borrower’s total monthly debt payments by their gross monthly income. This ratio is used by lenders to determine the borrower’s creditworthiness and ability to repay loans.
The formula for debt-to-income ratio is:
Debt-to-Income Ratio (DTI) = Total Monthly Debt Payments / Gross Monthly Income
For example, if a borrower has monthly debt payments of $1,500 (such as mortgage, car loan, credit card payments) and a gross monthly income of $5,000, the debt-to-income ratio would be 30% (1,500 / 5,000 = 0.3).
Different types of loans have different requirements for DTI ratios, but generally, a lower DTI ratio is considered to be more favorable. For example, a conventional mortgage loan typically requires a DTI ratio of 43% or less, while an FHA loan may allow a higher DTI ratio of up to 50%.
It’s important to track the DTI ratio over time, compare it against industry benchmarks and historical data, to identify areas where the company’s operations can be improved. It’s also important to track the DTI ratio by different segments, such as by different teams, products, or locations, in order to identify where the problem is and take action to improve the DTI ratio.
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