What does the DTI ratio measure?

The DTI (Debt-to-Income) ratio is a critical measure used in evaluating a borrower's ability to manage monthly payments and repay debts. It specifically calculates the ratio of a borrower's total monthly debt payments to their gross monthly income. This assessment helps lenders determine how much of a borrower's income is going towards paying current debts, thus indicating their financial health and capacity to take on additional debt, such as a mortgage.

For example, if a borrower has a monthly gross income of $5,000 and total monthly debt payments of $2,000, their DTI ratio would be 40%. Lenders typically look for a DTI ratio of 43% or lower, although some may accept higher ratios depending on other factors.

The other choices do not accurately describe what the DTI ratio measures:

• Monthly income against monthly savings focuses too much on savings and does not provide the necessary debt component.

• Loan amount compared to home value refers to the loan-to-value (LTV) ratio, not the DTI ratio.

• Qualifying income against expenses is vague and does not specifically address the debt aspect that is critical to understanding DTI.

Understanding DTI is essential for both lenders and borrowers as it plays a significant role in the