What is the calculation for the Debt-to-Income (DTI) ratio?

The Debt-to-Income (DTI) ratio is a key metric used by lenders to assess a borrower's ability to manage monthly payments and repay debts. This ratio compares an individual's total monthly debt payments to their gross monthly income, giving a clear picture of their financial health.

The formula for calculating the DTI ratio is to take the total monthly debt obligation, which typically includes the monthly housing costs (often referred to as PITI, which stands for Principal, Interest, Taxes, and Insurance) along with any other debt payments such as car loans, credit cards, and student loans, and then divide this total by the gross monthly income.

When considering the correct calculation, it focuses specifically on the total monthly obligations (including PITI) in relation to the borrower's gross income, which is captured in the proposed answer. This means that the total debt obligations (PITI included) are considered to provide a comprehensive overview of a borrower’s debt burden in relation to what they earn before taxes.

Using this understanding, it becomes clear why that answer accurately represents how to calculate the DTI ratio, setting a benchmark for lenders to evaluate the risk associated with providing a loan.