All
Members
Companies
Blog
Forums
Podcast
Webinars
    User Log in  /  Sign up
  • Forums
    Newest Posts Trending Discussions Followed Forums Real Estate News & Current Events General Landlording & Rental Properties Buying & Selling Real Estate Deal Analysis See All
  • Education

    Read

    BiggerPockets Blog BPInsights: Expert Analysis Coronavirus Content & Resources Guides Glossary Reviews Member Blogs

    Watch

    Webinars Video Library Financial Independence Blueprint Intro to Real Estate: Rentals

    Listen

    BiggerPockets Real Estate Podcast BiggerPockets Money Podcast BiggerPockets Business Podcast Real Estate Rookie Podcast Daily Podcast (Audio Blog)

    Topics

    Business Operations Finance Finding Deals Property Management Property Types Strategy
  • Network

    Recommended Vendors

    Real Estate Agents Mortgage Lenders Companies Hard Money Lenders Contractors Investment Companies

    Search

    Members Events Jobs
  • Tools

    Calculators

    Rental Property Fix and Flip BRRRR Rehab Estimator
    Wholesaling Mortgage Payment 70% Rule Airbnb

    Services

    BPInsights: Property Insights Tenant Screening Property Management Lease Agreement Packages

    New Feature

    BPInsights (beta)

    Quickly analyze a property address or ZIP Code to compare your rent in your neighborhood.

    Analyze a property
  • Find Deals
    Real Estate Listings Find Foreclosures External Link Ads, Jobs, and Other
  • Bookstore

    Real Estate Books

    Profit Like The Pros Bidding to Buy See all books

    Featured Book

    BiggerPockets Wealth Magazine book cover
    BiggerPockets Wealth Magazine

    Written by financial journalists and data scientists, get 60+ pages of newsworthy content, expert-driven advice, and data-backed research written in a clear way to help you navigate your tough investment decisions in an ever-changing financial climate! Subscribe today and get the Oct/Nov issue delivered to your door!

    Get the Magazine
  • Pricing
Log In Sign up
User
Quick search links
Podcast Hard Money Lenders Books Washington
BlogArrowReal Estate Investing BasicsArrowCaution: Your Debt-to-Income Ratio Can Make or Break Your Investing Career
Real Estate Investing Basics Jul 11, 2020

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

Whitney Hutten
Expertise: Mortgages & Creative Financing, Buying & Selling Houses, Personal Finance, Real Estate Investing Basics
46 Articles Written
loan-approval-investing

Right now, conventional lending rates in the U.S. are at historic lows.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

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

debt-income-ratio

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

increasing-income

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!

By Whitney Hutten
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...
Read more
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 hitting a homerun, then nearly losing it all on her second deal, Whitney took control and figured out how to invest in real estate the right way. She realized that success must leave clues. So, she studied and replicated the very personal finance and wealth creation strategies the wealthy use to create financial freedom. Today, Whitney is a partner in $370MM+ of real estate assets, including 3,000+ residential units (MF, MHP, SFR, and assisted living) and 1,430+ self-storage. Additionally, she has flipped over $1.7MM in residential real estate and a solid portfolio of commercial notes. (Don’t tell anyone, though... BRRRR investing is still one of her favorite ways to invest—26 units and counting!) In 2018, Whitney founded ASH Wealth, where she helps you develop a clear, workable plan that gives you the results you dream of, solves your business startup or scaling issues, and drives massive progress toward your real estate and financial goals.
Read Less
8 Replies
    Arlan Potter Investor/Accountant/Builder from Meno, Oklahoma
    Replied 6 months 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.

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Tom Wagner Investor from Hoboken, NJ
    Replied 6 months 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 6 months 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.

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Miles Lacy Investor from Kansas City, MO
    Replied 6 months ago
    Thank you for the detailed explanation of this important parameter Whitney.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 6 months ago
    You are very welcome!

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Annchen Knodt Investor from Durham NC (and Brenham, TX)
    Replied 6 months 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 6 months 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!

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
    Ryan Nastase Rental Property Investor from Tucson, AZ
    Replied 3 months ago
    Whitney, Great article! Can you field these two questions? 1) Do I have to wait for 2 years of tax returns to have the borrower (conventional) take into account rents? 2) If I am doing loans in only mine or my wifes name, but we are both on our primary resident morgage, does the entire monthly payment of our primary resident count towards my debt to income ratio? Or only half? Thanks in advance, Ryan

    Report Abuse

    Why are you reporting this?

    Additional Comments (optional)

    Cancel
Rotate Log in or sign up to comment

Related Blog Posts

Real Estate Investing Basics Jan 11, 2021

Note Investing: How To Find & Finance Real Estate Mortgage Notes

By Scott Smith

Investing in real estate mortgage notes is a profitable and hands-off alternative to hard real estate investment. Learn the ins and outs here.

Read more →

Real Estate Investing Basics Jan 04, 2021

Investing in Real Estate Mortgage Notes: How To Earn Passive Income Without Tenants or Toilets

By Scott Smith

When you invest in mortgage notes, you buy debt, not real estate. Step into the bank’s shoes and become the borrower’s new creditor.

Read more →

Real Estate Investing Basics Jan 01, 2021

Thinking Beyond Cash Flow: 3 Underappreciated Real Estate Wealth-Builders

By Matt DeBoth

Cash flow determines the value of property and whether or not it can be leveraged against. But by educating yourself on other advantages of real estate, you will set yourself up to make the most of this investment.

Read more →

Real Estate Investing Basics Jan 01, 2021

The Rise of Remote Real Estate Investing (and How to Get in on the Action)

By Tom Schneider

Remote real estate investing is similar to today’s growing work-from-home trend. You no longer have to be in the office to work, so why do you have to buy real estate in the same city that you live in?

Read more →
Log in Sign up

Log in

Forgot password?

If you signed up for BiggerPockets via Facebook, you can log in with just one click!

Log in with Facebook

Or
btn_google_dark_normal_ios Created with Sketch. Continue with Google

Let's get started

We just need a few details to get you set up and ready to go!

Use your real name

Use at least 8 characters. Using a phrase of random words (like: paper Dog team blue) is secure and easy to remember.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.

Or
btn_google_dark_normal_ios Created with Sketch. Continue with Google

Why create an account?

Receive a free digital download of The Ultimate Beginner's Guide to Real Estate Investing.

Connect with 1,000,000+ real estate investors!

Find local real estate meetups and events in your area.

Start analyzing real estate properties, we do the math for you.

It's free!

Explore

  • Membership
  • Community
  • Education
  • Marketplace
  • Tools
  • FilePlace
  • REI Resources
  • Perks
  • Glossary
  • Reviews
  • iOS App
  • Android App

Company

  • About Us
  • Press
  • Advertising
  • Careers
  • Stats
  • Contact Us

Important

  • Editorial Guidelines
  • Terms of Use
  • Rules
  • Privacy
  • FAQ

Social

  • Facebook
  • Twitter
  • YouTube
  • Instagram
© 2004-2021 BiggerPockets, LLC. All Rights Reserved.