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Understanding Debt-to-Income Ratio (DTI)

The Debt-to-Income (DTI) ratio is a financial metric used to evaluate an individual's ability to manage monthly payments and repay debts. It is calculated by dividing total monthly debt payments by gross monthly income and is expressed as a percentage. Lenders use the DTI ratio to assess the risk of lending money to a borrower, as it indicates the borrower's financial health and capacity to take on additional debt.

A lower DTI ratio suggests a good balance between debt and income, making it easier to obtain loans or credit. Conversely, a higher DTI ratio may signal potential financial stress, making lenders more cautious about extending credit. Generally, a DTI ratio below 36% is considered favorable, though different lenders may have varying thresholds.

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