Debt-to-Income Ratio Analysis
This worksheet explores the concept of Debt-to-Income (DTI) ratio, its calculation, significance, and implications for financial health and borrowing capacity at a Grade 12 level.
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Debt-to-Income Ratio Analysis
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Read each question carefully and provide thoughtful answers based on your understanding of Debt-to-Income Ratio principles. Show all calculations where applicable.
1. Which of the following best defines the Debt-to-Income (DTI) ratio?
A measure of how much debt an individual has compared to their assets.
The percentage of a borrower's gross monthly income that goes toward paying debts.
The total amount of debt an individual owes.
The ratio of liquid assets to total debt.
2. A lower DTI ratio generally indicates:
A higher risk for lenders.
Greater borrowing capacity.
More financial stress.
An inability to secure loans.
3. The two main types of DTI ratio are the front-end DTI and the DTI.
4. Lenders typically prefer a total DTI ratio of or less.
5. To calculate the DTI ratio, you divide your total monthly debt payments by your gross monthly .
6. Explain the difference between front-end and back-end Debt-to-Income ratios. Which one is generally more important to lenders and why?
7. Sarah has a gross monthly income of $4,500. Her monthly debt payments include a car loan of $350, student loan payments of $200, and a minimum credit card payment of $50. Calculate her back-end Debt-to-Income ratio. Show your work.
8. A high DTI ratio always means an individual will be denied credit.
True
False
9. Reducing your DTI ratio can improve your chances of qualifying for a mortgage.
True
False
10. Discuss three strategies an individual could employ to lower their Debt-to-Income ratio. For each strategy, explain its potential impact on their financial well-being and borrowing capacity.