What does the term "debt-to-income ratio" refer to?

The term "debt-to-income ratio" refers to a measure of monthly debt payments in relation to gross income. This financial metric is calculated by taking the total monthly debt obligations—such as mortgage payments, car loans, student loans, and credit card payments—and dividing it by the gross monthly income (before taxes and other deductions).

This ratio is important for lenders when assessing a borrower's ability to manage monthly payments and repay debts. A lower debt-to-income ratio typically indicates that an individual has a good balance between their income and debt obligations, making them a more attractive candidate for loans and credit. Conversely, a higher ratio may suggest that a borrower is over-leveraged, posing a higher risk to lenders.

In summary, the debt-to-income ratio is a critical indicator of financial health, reflecting how much of an individual’s income is being used to pay off debts, which ultimately influences creditworthiness and borrowing capacity.