Which of the following is true about the debt-to-income ratio?

Question

BlackTom AI · Accepted Answer

Here is a structured analysis of each answer option regarding the debt-to-income (DTI) ratio.

Option 1: 'Guidelines suggest that the debt-to-income ratio should be about 40%.' This statement asserts a specific guideline value. In reality, while lenders often use a target around 36% to 43% for front-end and back-end DTIs, there is no universal rule that the DTI should be exactly 40%, and guidelines vary by lender and loan type. Moreover, saying 'about 40%' is an oversimplification that does not capture the broader nuance across programs and borrower situations.

Option 2: 'The debt-to-income ratio is also known as the 10-70-20 guideline.' This is incorrect. The 10-70-20 guideline is a budgeting rule describing how to allocate take-home pay (10% savings, 70% needs, 20% debt repayment or other expenses). It is unrelated to the DTI, which is a lender-derived ratio comparing debt payments to gross monthly income.

Option 3: 'None of the answers provided are true.' Given that one of the options correctly describes the DTI, this statement would be false. At least one option aligns with the standard concept of DTI, so this cannot be the correct choice.

Option 4: 'The ratio measures the amount of monthly income that should be allocated to creditors to pay monthly debt payments.' This is a reasonable description of the DTI concept. The DTI ratio expresses the portion of monthly gross income that goes toward debt obligations (such as housing, loans, and other debt payments) and helps assess an individual’s ability to manage new debt. While the phrasing could be refined (DTI is typically the percentage of gross monthly income dedicated to debt payments), the core idea—that it represents the portion of income allocated to creditors for debt payments—is correct.

In summary: Option 4 accurately describes the debt-to-income ratio's purpose, while Options 1 and 2 present common misconceptions or mischaracterizations, and Option 3 denies a correct statement that does exist among the options.

FSOS 1301 (001) Quiz 1

Which of the following is true about the debt-to-income ratio?

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