What is assessed to determine the ratio of a borrower's total debt to their gross income?

The ratio of a borrower's total debt to their gross income is known as the debt-to-income (DTI) ratio. This financial metric is crucial for lenders in assessing a borrower’s ability to manage monthly payments and repay debts. The DTI is calculated by taking all monthly debt obligations, such as mortgage payments, car loans, student loans, and credit card payments, and dividing this sum by the borrower’s gross monthly income.

A lower DTI indicates that a borrower has a comfortable level of debt relative to their income, which suggests they are more capable of handling additional debt. Lenders use this ratio as a guideline to evaluate risk and determine whether they want to approve a loan application.

Other options do not specifically measure the relationship between total debt and income. Employment history, for instance, focuses on the borrower's job stability rather than their financial obligations. Credit utilization refers to the ratio of credit card balances to credit limits and is a factor in assessing creditworthiness but does not address total debt relative to income. The loan term describes the length of time over which a borrower will repay a loan and does not convey information about debt levels in relation to income.