Where is debt-to-income ratio used?
Most often, debt-to-income ratios come up in discussing personal finance, especially mortgage loan applications. Although other loans look at this figure, it's often less prominent, and many people don't even realize it's part of the equation. But for mortgage loans, DTI is very upfront, and most people realize it's a number that's as important as their credit score when it comes to whether or not they'll be approved for their loan.
However, debt-to-income ratios are also important for businesses, with smaller businesses needing to pay better attention than larger ones. Small businesses often have to rely on traditional credit sources like banks, so their debt-to-income ratios are just as important as they are for individual borrowers. Enterprises have less to worry about since they often use alternative credit sources, but investors may be interested in the ratio of debt to income of these businesses, too.
How to calculate debt-to-income ratio?
Debt-to-income ratios are pretty simple to calculate. All you need to know is the amount of monthly debt payments and the amount of monthly income. Then, you plug them into this formula:
D = monthly total debt
I = monthly total gross income
DTI = D / I
So, if your monthly debt totaled $1500 and your monthly gross income totaled $4000, your debt to income would work like this:
$1500 / $4000 = 0.375 or 37.5%, which is a pretty decent DTI for most purposes.
Debts that are included are those that have a regular payment involved – things like mortgages, notes, and revolving credit.