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Debt-to-Income (DTI) Ratio

Debt-to-Income (DTI) Ratio

A financial tool that helps lenders evaluate a borrower's ability to repay a loan. It is calculated by dividing the borrower's total monthly debt payments by their total monthly income. For example, if a person has $2,000 in monthly debt payments and earns $5,000 per month in income, their debt to income ratio would be 40%. This tells lenders how much of the borrower's income is being used to pay off debts and how much is left over for other expenses. A high debt to income ratio suggests that the borrower may struggle to make their loan payments and could be at risk of defaulting. Lenders typically prefer a debt to income ratio below 36%, although this can vary depending on the lender's specific requirements and the type of loan being applied for. In general, a lower debt to income ratio indicates that a borrower is financially healthy and has a better chance of being approved for a loan with favorable terms.
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