Certified Financial Planner (CFP) Exam 2026 – 400 Free Practice Questions to Pass the Exam

The debt-to-income ratio is a critical financial metric that lenders consider before extending a mortgage because it provides insight into a borrower’s ability to manage monthly payments and repay borrowed money. This ratio is calculated by dividing the total monthly debt payments by the borrower’s gross monthly income.

A lower debt-to-income ratio indicates a better financial position, suggesting that the borrower has a sufficient income to cover additional mortgage payments without exceeding a manageable debt level. Lenders typically use this ratio to assess risk; a high ratio may signal that the borrower could struggle to make mortgage payments along with their existing debts.

While current liabilities, monthly discretionary expenses, and annual income are also relevant to a borrower's overall financial picture, the debt-to-income ratio specifically highlights the relationship between debt obligations and income, making it a valuable tool for lenders assessing a borrower's creditworthiness and repayment capacity before extending a mortgage.