Debt-to-income ratio, known in the lending industry as DTI, seems pretty simple on paper. It’s got a few unexpected elements, though, so we’ll lay it out in plain language for anyone who needs to know.

What exactly is DTI?

The name is self-explanatory — DTI is the ratio of the income you bring in to the debt you pay. It’s typically calculated based on monthly figures and used as a measure of your borrowing fitness.

Two types of DTI are used to assess a potential borrower — front-end and back-end ratios — and they each produce slightly different results when calculated. Front-end DTI is determined by dividing your monthly income by your aggregate monthly housing costs, which consists of mortgage principal, interest, taxes and insurance for homeowners and the monthly lease amount for renters.

Back-end DTI includes all expenditure covered by the front-end variety and adds on other debt-related expenses, such as payments on your student loans, your car note and your credit cards. Court-appointed expenditures like alimony and child support are also taken into account when calculating DTI on the back end.

Most lending agencies use the notation A/B to express their thresholds for the different types of DTI. For instance, if the DTI limit for your chosen lender is 29/41, you must have a front-end DTI lower than 29 and a back-end lower than 41 for your ratio of debt to income to satisfy their lending conditions.

Knowing your DTI

Although your experience may vary based on the particular circumstances of your financial situation, most lenders will tell you that a back-end DTI of less than 36 percent is considered ideal for credit-worthiness. Between 37 and 42 percent DTI is sometimes viewed as manageable and sometimes as dangerously borderline, and back-end DTI of 50 percent or greater may be cause for serious financial intervention.

Of course, the exact numbers at which you’re “credit-safe” or “credit-forbidden” are determined by individual lenders on a case-by-case basis. If you want to know where you stand, several calculation tools exist on the Web.

It’s also not especially difficult to calculate a fair estimate of your DTI using good old-fashioned pencil and paper. Just write down your monthly payments that qualify as front- or back-end debt and divide that by your gross (pre-tax) monthly income. Multiply the resulting figure by 100 and there you have it!

One scary possibility

Personal finance beginners be warned, though: oversimplifying DTI might be dangerous to your peace of mind. Just ask anyone who’s heard the term “debt-to-income ratio” and assumed it meant the ratio between their annual income and their total accumulated debt.

Let’s take an example of how scary that misunderstanding can be. In 2011, the average aggregate debt for a Canadian family of four surpassed $100,000 while the national median income remained below $50,000, according to The Globe and Mail. Do the DTI calculation on those amounts and you wind up with a back-end ratio around 150 percent — more than triple what’s typically considered credit-worthy.

Avoid that incorrect assumption, though, and knowing your debt-to-income ratio can help you better understand whether you can afford to borrow money. Just as with most things in personal finance (or in life), a little more understanding can’t hurt.