The world of personal finance can seem like a maze. This is especially true if you're in the market for a loan where you'll almost always come across the term Debt-to-Income (DTI) ratio. This small figure can provide you with great insight into your financial well-being. Which brings me to the topic of DTI and why you should pay attention.

Debt to Income (DTI) Ratio

The DTI ratio simply means how much of your income goes to paying debts. Banks use this to determine how well you can carry a monthly payment and repay money borrowed. In general, the lower the DTI, the better your odds of being approved for a much sought-after loan. The Debt-to-Income Ratio (DTI) is an important financial metric that is used in many types of credit loans and financing. Compared by adding up all monthly debt payments and then dividing that amount by gross monthly income, and expressed as a percentage. For example, if your monthly debts total $2,000 and your gross monthly income is $6,000, your DTI would be 33.3%. Lenders use this ratio as a snapshot of your financial health, building a picture of what you can and can't afford to do – essentially, the proportion of your existing income that is tied up in servicing existing financial commitments. The humanized text is 100% human score, unlock more features at 

Why is DTI Important?

How your DTI ratio matters! If you have a low DTI that means you can likely get approved for loans such as a mortgage, an auto loan, or a personal loan. It can affect the interest rates that you qualify for. Lower the better, can mean better rates. DTI also shows how financially healthy you are today, if you are living within your means. A lower DTI means that you have a decent balance of debt and income, meaning your debt is likely to be within your ability to handle. At the other end of the spectrum, a high DTI indicates a possible future inability to make payments, which brings up a red flag to potential lenders. Most lenders want the highest (which is usually 43%) DTI you can have, but preferably fewer than 36%. That said, individual loan requirements can change on the type of credit and the standards of the lender. A healthy DTI is key to getting a loan but will also be helpful with long-term financial wellness. It allows people to budget properly, save up for future goals, and steer clear of the woes of crushing debt. 

How to Calculate Your DTI Ratio

Place all of your monthly recurring debts on one list, things like your mortgage or rent; your student loan; your car loan; your credit card payments; anything where you alone or you and your co-borrowers are responsible for a monthly loan payment. Divide total monthly debt by gross monthly income and multiply by 100. Multiply the resulting number by 100 to convert it to a percentage. For example, if your total monthly debt payments are $2,000 and your gross monthly income is $5,000, your DTI ratio would be ($2,000 / $5,000) * 100 = 40%. Lenders use the DTI ratio to assess your ability to manage monthly payments and repay borrowed money. Generally, a lower DTI ratio indicates a better financial health and increases your chances of securing a loan.

Conclusion

The Debt-to-Income (DTI) ratio is the backbone of your financial health, and it also plays a major role in aiding loan approval. Plus, your lowered DTI shows lenders that you're a less risky candidate, setting you up for improved financial options. Just remind yourself that it's not only about having your credit approved for loans, but it should also be for your sound financial resources. Stay informed, do the math on your DTI and be able to make informed choices for a financially healthier you!