Real Estate Investing Basics

Caution: Your Debt-to-Income Ratio Can Make or Break Your Investing Career

Expertise: Mortgages & Creative Financing, Real Estate Investing Basics
37 Articles Written
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Right now, conventional lending rates in the U.S. are at historic lows.

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At the same time, some investors and new home buyers are finding it harder than ever to qualify for a loan for many reasons, including failing the underwriter's debt-to-income (DTI) criteria, insufficient income, and insufficient credit or credit history.

DTI is a lending qualifying criteria calculated as the percentage of total debt divided by total income. Conventional lenders use DTI as a measure of your ability to pay the debt service on the property. While different lenders have different DTI underwriting parameters, in June 2020 the max DTI for a Fannie Mae loan is 45% with a great credit score and proper reserves. (There are a couple of exceptions to this rule.) It's worthwhile to note that the DTI underwriting parameters change over time, so be sure to work with your lender on what the parameters are at the time you apply.

DTI Explained

While the formula to calculate DTI looks straightforward, let’s dive deeper into what actually makes up the numerator and denominator of the equation.

The lender will review all of your consumer and current property debt noted on your credit report. They will calculate your required payments on your consumer debt. This is generally noted on your credit report as well. After that, the lender will calculate the required payments (operational expenses) on your properties, which include principal, interest, taxes, insurance, and if applicable, homeowner's association dues.

Pro Tip: As you scale your rental portfolio, make sure all properties have a debt service coverage of 1.25+ to avoid adding any investment debt to your personal balance sheet.

The lender will then calculate all qualifying income documented on your tax return for the past two years. For most people, their main source of income is W-2 income from a job. If you have additional investments, rentals, or self-employment income, you may be able to include it as well. (Make sure to talk to your lender to see if this income qualifies.)

Then the lender will take your total debt divided by your total income and multiply that figure by 100 to come up with a DTI percentage. (Here is a calculator to help you do a high-level calculation on your own.) If this DTI percentage falls within the lender’s underwriting criteria, you’ll be approved! If this DTI percentage does not fall within the lender’s underwriting criteria, you will most likely receive an “ineligible” recommendation.

Related: 4 Ways to Find Private Money Lenders to Fund Your Real Estate Deals

How To Fix a High DTI Ratio

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If you have been denied a loan for high DTI, or if you just went through the calculations above and realized your DTI is out of whack, hope is not lost. Follow the steps below to rehab your DTI.

Review Your Credit Report

There are things you can do to increase your credit score, thus helping to improve your DTI. You can open up another credit card account, pay all your bills on time, increase your credit limits, and more. For a thorough guide, check out this handy list 0f 12 simple steps to follow.

Decrease Your Debt Expenses

Pay off consumer debt/credit card debt noted on your credit report. For the purposes of DTI rehab, you should think about tackling the highest debt payment first.

You should also pay off any high interest/high payment loans on cars, trailers, RV, etc. Also consider selling these liabilities to ditch the debt payment, and maybe recoup some pocket change to add to your next down payment. Again, for the purposes of DTI rehab, think about tackling the higher debt payment first.

Related: Pay Off Debt Fast With These Smart Money Moves 

Increase Your Income

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Schedule a meeting with your boss and ask what you need to do to get that promotion and/or raise. Take extensive notes—and then do it! Think about switching to a higher paying job (potentially with a competitor) or higher-paying field. Add in a side hustle or two and claim the income on your tax return.

And, of course, if you are super serious about building wealth, do all of the above!

Pulling It All Together

While the DTI ratio can seem like a daunting lender criterion to meet for a first-time investor or home buyer, this is one of the more straightforward underwriting criteria that you can personally impact. Once you get your debt-to-income in a good place, protect it, as this could be the very key to you building wealth through real estate.

What do you do to keep your debt-to-income ratio in a good place?

Share with a comment below!

Whitney is a real estate investor and personal finance trainer whose vision is to launch 10,000 families on the path toward financial independence. After purchasing her first rental in 2002, and hi...
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    Arlan Potter Investor/Accountant/Builder from Meno, Oklahoma
    Replied about 1 month ago
    My Debt to Taxable income is about 45/1 Debt to Income before depreciation is probably 15/1 Debt to income was more of an issue when I was working with FICA income. It seems to affect the guys starting out more than someone investing for 20 years. At some point cash flow and Equity sort of take over.
    Tom Wagner Investor from Hoboken, NJ
    Replied about 1 month ago
    Awesome article, Whitney! Could you go into more detail on this aspect? “Pro Tip: As you scale your rental portfolio, make sure all properties have a debt service coverage of 1.25+ to avoid adding any investment debt to your personal balance sheet.” Why is this important and how does your debt service coverage ratio on your first 2-3 properties affect your ability to finance properties 4-5?
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 13 days ago
    Sure. The bank wants to see that the income from the property clears your expenses by good margin. If you have $1000 in rent, the bank will credit you $750 as income on the property. If the expenses are $725, then you're golden and $25 goes to the income side of your balance sheet. If the expenses are $775, then you are short $25 and this hits the debt side your balance sheet making your DTI go higher not lower. Do this too many times, and you can get shutdown from lending. I've also seen commercial lenders just not lend on a property if it's not 1.25 at all... especially if the property is guaranteeing the loan and not the individual.
    Miles Lacy Investor from Kansas City, MO
    Replied 29 days ago
    Thank you for the detailed explanation of this important parameter Whitney.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 13 days ago
    You are very welcome!
    Annchen Knodt Investor from Durham NC (and Brenham, TX)
    Replied 29 days ago
    Thanks so much for this article and all your other contributions to BP, Whitney! I have found all your content to be very informative and inspiring :-) This DTI question is looming large in my mind right now because I am looking to purchase a personal residence and concerned with how it will affect my ability to qualify for a cash-out refinance on a property I am in the process of BRRR-ing. A question I have is whether the lender will include the potential new debt for the subject property when calculating the DTI - I would assume so but wanted to double check. Thanks again!
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 13 days ago
    You are welcome, Annchen. A loan on a primary residence will hit the debt side of your balance sheet. Talk to your lender and see where you are at if you took on this debt!