Which statement best describes the debt-to-income ratio?

• A. It compares total monthly debt payments to total assets.
• B. It compares total monthly debt payments to annual income.
• C. It compares monthly debt payments to monthly gross income.
• D. It compares credit scores to monthly debt payments.

Answer: (C)

Debt-to-income ratio measures how much of your monthly gross income goes toward debt payments. It is calculated by taking your total minimum monthly debt payments and dividing them by your gross monthly income (income before taxes). This helps lenders judge how much extra debt you could reasonably manage.

For example, if you pay $1,200 each month in debt obligations and your gross monthly income is $4,000, your DTI would be 1,200 divided by 4,000, which equals 0.30 or 30%. A lower DTI suggests you have more money available to take on new debt, while a higher DTI indicates tighter finances.

The correct description specifically uses monthly figures and gross income, which is why it matches the statement about monthly debt payments to monthly gross income. Other options don’t fit because one compares debt to assets (not related to DTI), another uses annual income (DTI is usually expressed monthly), and another mixes credit scores with debt payments (DTI is about debt relative to income, not credit scores).