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A DTI ratio, known as a Debt to Income ratio is the fraction of your gross monthly income that pays for your monthly debts. When calculating a DTI ratio, you use your gross income. This is your income without any tax deductions made. A DTI ratio allows lenders to gauge your ability to repay a loan, and how well you can manage it given everything else you have to pay for from your income.
Lenders identify individuals with a small DTI ratio as customers who are less risky. This is because such individuals have a smaller likelihood to run into financial problems that may to a default.
It’s pretty straight forward to calculate your DTI ratio. You start by summing up all monthly debts you are obligated to pay. You then calculate the ratio of this number and the income you receive monthly. Finally, multiply this number by 100, and this is your DTI.
Using our Debt to Income calculator is pretty easy. You need to follow the following steps and you’re all good.
A Debt to Income ratio is preferred to be a small figure. However, an ideal figure would require an understanding of front-end DTI as well as back end DTI.
Front End DTI Ratio
This is the monthly amount you set aside for mortgages, home insurance, homeowners fee, property tax and other housing expenses. A preferred front-end DTI ratio would be below 28%.
Back End DTI Ratio
This includes the expenses pertinent to your housing such as mortgages and property taxes added to your car loans, personal loans and other debts you are obligated to pay.
As said earlier, it is desirable to a have a low DTI ratio. Here are some of the ways you can have a lower ratio.
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