Your debt-to-income ratio is one of the most important metrics lenders use to evaluate your ability to manage monthly payments and repay borrowed money. It is expressed as a percentage of your gross monthly income that goes toward paying debts each month.

There are two types of DTI. The front-end ratio (also called the housing ratio) considers only your housing costs, including mortgage or rent. Most lenders prefer this to be at or below 28%. The back-end ratio includes all recurring monthly debts, and lenders generally look for this to be at or below 36%, though FHA loans may allow up to 43% or higher.

A lower DTI ratio signals to lenders that you have a healthy balance between debt and income, making you a less risky borrower. If your DTI is higher than you would like, you can improve it by increasing your income, paying off existing debts, or avoiding taking on new debt before applying for a major loan such as a mortgage.