Debt-To-Income Ratio (DTI)

Debt-to-income ratio, or DTI, is a financial measure that compares an individual’s debt obligations against the gross income level. This is an important measure in the lending industry because it provides a measure of borrower’s credit worthiness.

There are two kinds of debt-to-income ratios:

1. Front ratio — This is the percentage of gross income that goes toward housing costs. For renters, this is rent divided by income. For homeowners this is PITI divided by income (PITI includes Mortgage Principal, Interest, Taxes, and Insurances).
2. Back ratio — This is the percentage of gross income that goes toward paying all recurring debt payments, including those included in the front ratio. Examples of other debt payments include payments for credit cards, car loan, student loan, child support, etc.

In general, higher debt-to-income ratio means that the borrower is less creditworthy, because it’s less likely that he or she will have enough money to cover the debt payment.