Which liability factor do lenders use to assess a borrower's ability to repay a loan?

Lenders assess a borrower's ability to repay a loan primarily by looking at existing debt or debt-to-income (DTI) ratios. The DTI ratio is a critical factor because it provides insight into the borrower's financial health by comparing their total monthly debt obligations to their gross monthly income. A lower DTI indicates a borrower has a manageable level of debt relative to their income, which suggests a better ability to make timely loan payments.

This metric is particularly important because it helps lenders determine whether a borrower will be financially capable of handling additional debt without overextending themselves. By looking at the DTI, lenders can make informed decisions about loan approvals and the terms of those loans, ensuring that borrowers are not taking on more debt than they can realistically manage.

While factors like credit score, employment history, and loan-to-value ratio are important in the overall assessment of a borrower, they do not provide as direct an understanding of ongoing repayment capacity as the DTI ratio does. For instance, a high credit score might suggest a history of responsible borrowing, but without a favorable DTI, it may still indicate a risk of default.