debt-to-income (DTI) ratio
Debt-To-Income (DTI) Ratio is an important measure of risk that divides your total monthly debt payments by your monthly income. Lenders use it to determine how well you manage monthly payments and the probability that you can afford to repay your loan. People with higher DTI ratios are seen as riskier borrowers because they could have trouble repaying their loans when experiencing a financial hardship. To calculate your debt-to-income ratio, add up all of your monthly obligations: rent or mortgage payments, student loans, personal loans, auto loans, credit card payments, alimony or child support, etc. and divide the sum by your monthly gross income (that means before taxes or 401(k) contributions etc. are taken out) . A good DTI would be 36% or lower.
A quick example: if you pay $750 in rent and $250 in student loan payment per month and make $3,000 before taxes your DTI would be ($250 + 750) / $3000 = $1000/$3000 = 33%