Debt-to-income ratio - Financial definition
Concise definition of the term debt-to-income ratio
The debt-to-income ratio is a financial metric comparing an individual or entity's total debt payments to their gross income.
Comprehensive definition of the term debt-to-income ratio
The debt-to-income ratio is a critical financial metric used by lenders to assess an individual's or entity's ability to manage debt obligations relative to their income. It is calculated by dividing total monthly debt payments by gross monthly income.
A lower ratio indicates a healthier financial position, signaling that the borrower has more income relative to their debt burden, making them less risky to lend to. Lenders often use this ratio when evaluating loan applications, as it provides insight into the borrower's ability to repay debts. For example, a mortgage lender typically looks for a debt-to-income ratio below a certain threshold to approve a home loan, ensuring the borrower can afford monthly mortgage payments alongside other debt obligations.