What Is a Debt-To-Income (DTI) Ratio & How Is It Calculated

What Is a Debt-To-Income (DTI) Ratio & How Is It Calculated

Before a lender approves any mortgage application, the underwriting department verifies one's ability to repay the loan first. The mortgage isn't the only payment that a borrower will have - there are car loans, student loans, personal loans, credit card debts and more. The lenders consider all the money owed to other lenders to calculate one's debt-to-income (DTI) ratio. These minimum monthly payments are added together with the monthly mortgage payment and divided by one's gross monthly income to determine this ratio. For example, a monthly mortgage payment of $1,000 plus $2,000 in other monthly debt obligations (credit card, loans, etc.) will be divided the gross monthly income of $10,000. So $3,000 in monthly payments divided by $10,000 is 0.3 or a 30% debt-to-income ratio. Between the loan-to-value (LTV) and the debt-to-income ratio, if deemed a high risk, one will likely pay a higher interest rate.
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