What is a debt-to-income ratio and why does it matter?

A debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward paying debts. You calculate it by dividing your total monthly debt payments by your gross monthly income. For example, if you earn $5,000 per month and pay $1,500 toward debts, your DTI is 30%. It matters primarily because lenders use it to evaluate your ability to manage monthly payments and repay borrowed money. Most mortgage lenders prefer a DTI below 43%, with 36% or lower considered ideal. A high DTI signals financial strain and makes lenders less willing to approve loans or offer favorable interest rates. Keeping your DTI low improves your borrowing power and indicates you have a healthy balance between debt and income.