What does the DTI ratio measure in mortgage lending?

The debt-to-income (DTI) ratio is a critical financial metric in mortgage lending. It measures the proportion of a borrower's monthly debt obligations to their gross monthly income. This ratio helps lenders assess a borrower's ability to manage monthly payments and repay debt. By calculating the DTI, lenders can evaluate whether a borrower is likely to be able to make their mortgage payments alongside other financial commitments, such as car loans, student loans, and credit card debts.

A low DTI suggests that a borrower has a manageable level of debt relative to their income, which may indicate a lower risk for the lender. Conversely, a high DTI can signal that a borrower may struggle to handle additional debt, impacting their likelihood of defaulting on a mortgage. Therefore, understanding the DTI is essential in the underwriting process as it directly relates to a borrower’s financial stability and creditworthiness.