Real Estate Investing Basics

What Is a Debt-to-Income Ratio (DTI) and How Is It Calculated?

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Mortgage lending underwriting criteria falls into three general categories—credit, collateral, and capacity. Credit has to do with how well you pay your bills (as evidenced by a credit report and score), collateral has to do with the type and quality of the property you're using to secure the loan, and capacity has to do with your financial ability to repay the loan.

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Your debt-to-income ratio falls into the latter category—capacity—and is considered an important factor in determining your financial ability to pay back your mortgage.

What Is a Debt-to-Income Ratio?

Your debt-to-income ratio, or DTI, expresses in percentage form how much of your gross monthly income is spent on servicing liabilities, such as auto loans, credit cards, mortgage payments (including homeowners insurance, property taxes, mortgage insurance, and HOA fees), rent, credit lines, etc.

Living expenses, such as cable, gas, electricity, groceries, etc., are not considered part of your DTI.

If your DTI is high, it means you are highly leveraged and have tight finances, which, naturally, is considered risky from a lending standpoint. On the other hand, if your DTI is low, the lender knows you have plenty of room in your monthly budget to absorb unexpected expenses and still make your mortgage payments.

Both Fannie and FHA allow for higher DTIs under limited circumstances, but there are standard guidelines.

Related: How I Went From $100,000 in Debt With No Job to Debt-Free in 5 Years

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Calculating Your Debt-to-Income Ratio

If you're in the market for a home loan, it doesn't hurt to calculate your debt-to-income ratio ahead of time so you know where you stand. To do this, simply tally up your total monthly debt obligations and divide by your gross monthly income, as follows:

  1. Either obtain a recent copy of your credit report or gather up your most recent statements for all your debt obligations. Note that only debt obligations are included in your DTI, not utility bills, phone, cable, etc.
  2. Tally up your payments for all debts, including auto loans, credit cards (use just the minimum payment), credit lines, student loans, and any other debt obligations that you have. If you have an American Express credit card, use 5 percent of the outstanding balance if the minimum payment is showing as the full balance on your credit report. Note that underwriters will include any child support payments in your DTI.
  3. Add your rent or home mortgage payment, including monthly property taxes, homeowner’s insurance, homeowner’s association (HOA) fees, and private mortgage insurance (PMI) premiums.
  4. Divide your total debt obligation figure by your gross monthly income (assuming you’re a W-2 wage earner), then multiply by 100 to get a percentage.

Related: Why Boosting Your Credit Score to “Excellent” Can Make You a Better Investor

If you're self-employed, I recommend working with your loan agent to determine your qualifying DTI. Self-employed income verification is more complicated and there's really no way to determine your qualifying income definitively without tax returns.

Keep in mind that when you're qualifying for a home loan, your qualifying DTI will be based on what your expenses will be after the loan is complete. In other words, if you're currently renting and are taking on a house payment higher than what you're paying for rent, your qualifying DTI will be based on the new mortgage payment. If you're refinancing and consolidating debts, your qualifying DTI will reflect your expenses after the various debts are consolidated.

Any questions about calculating DTI? Any tips you’d add?

Leave your comments below!

Mark Fitzpatrick is a Senior Loan Consultant with Lenox Financial Mortgage Corporation based in Irvine, Calif. I specialize in helping families and real estate investors reach their real estate goals. I am also a real estate investor and an experienced veteran of the mortgage industry, who is licensed to do business in CA, NV, NC, TX, and VA.

    Tyler Huntington from Long Beach, California
    Replied almost 3 years ago
    Great read. Anyone interested in buying a home should have a basic understanding of Dti and what it takes to qualify for a mortgage. I am surprised when my clients have no idea what Dti is or how to work it’s calculated.
    Greg Braun Interior Decorator from Eau Claire, WI
    Replied almost 3 years ago
    For having purchased several homes I never new quite why they collected all that information. This makes a lot of sense. What is a good range to keep your DTI in to get loans for rental properties? Thanks for the article Mark. Very concise and easy to learn.
    Justin Smith from Greenville, NY
    Replied almost 3 years ago
    I’d like to second this. What is a decent range for your DTI.
    Patrick Boutin from Hayward, California
    Replied almost 3 years ago
    I have a question about rent cost. The house where I live, has a rent of $2,900 dollars per month. I live however with my girlfriend and two other roommates and between the 4 of us we pay the rent which this way becomes quite affordable. In my case what I pay is $650. Can I still use this number as my rent payment or do I have to include the full $2,900?
    Account Closed Financial Advisor from dallas, texas
    Replied almost 3 years ago
    I own my car 100 percent but it is old and falling apart. I am planning on buying a house and a used $10K car shortly. From the perspective of the bank, am I a better borrower if I buy the house first and then the car, buy the car in cash but have barely enough money to make a down payment on the house, or take out a car loan then buy a house? Thanks in advance.
    Bernard Braithwaite Investor from Waterford, Connecticut
    Replied almost 3 years ago
    Depends on if the house us gonna be a primary residence or if you want to use it as an investment property. If it’s fir investment, buy the house first…then rent it out for cash flow… If you want the house as a residence only to live in it will be looked at as a liability.
    Bernard Braithwaite Investor from Waterford, Connecticut
    Replied almost 3 years ago
    Sorry for the typos lol
    Matthew Ramos from Altamonte Springs, Florida
    Replied almost 3 years ago
    Thomas, I would look at this from the lender’s perspective. Who would you rather lend money to? A. A borrower with $10K in the bank B. A borrow with $0 in the bank I think most would rather lend to A. Based on the article above, I would not take out a car loan until AFTER I bought the house. Again, it comes down to who I would prefer to lend to. A. A borrower with no car payment (therefore a lower DTI) making X B. A borrower with a $200/m car payment making X. Also, I’m not sure if there is 0 down financing out there any longer from conventional lenders so you would probably need at least 3% down to get a home loan. I’m not a mortgage professional so take my advice with a grain of salt.
    John Mathewson from Schererville, Indiana
    Replied almost 3 years ago
    Appreciate the article. Probably one of the most fundamental things a person needs to understand when it comes to getting started in real estate.
    Tiffany Liu from Forest Hills, New York
    Replied over 2 years ago
    I’ve read that a DTI of 36% or less is the bright line underwriters use for residential mortgages. Not sure if others have heard/read the same. But I have a question on how you factor in rental income/expenses to the DTI calculation. Assuming you’ve been a landlord for 2 years and “seasoned” to count those in. Do you net the rental income (75% of rental income) against expenses (PITIA) and add/subtract from your Income number (denominator) or do you split the rental income and PITIA between Debt (numerator) and Income (denominator). Thanks!
    Morgan Mathews from San Francisco, California
    Replied almost 2 years ago
    Great article and information – should the calculation be adjusted for your spouses income/debt as well. I’m a newbie, so I’d like to know when you are applying for a mortgage if lenders are looking at both you and your spouse’s credit score, income, debt, etc???
    Jake Thompson Rental Property Investor from Brownsville, OR
    Replied over 1 year ago
    Morgan, from what I understand if you and your wife are applying together, it will be your combined income and debts. The flip side to that is you both are using up one of your Fannie Mae/Freddie Mac loans (limit is 10). This isn’t something I’d worry about too much if you’re just getting started, just something to be aware of. I’d speak with a loan officer to get the most accurate and up to date info though!
    Karl Hendricks Investor from Richmond, VA
    Replied 4 months ago
    I have maxed out my VA home loan cap and have been looking at options to free up my debt to income ratio by possibly transferring those properties into an LLC or similar. My lender said after conducting such a transfer the devt would still count against my debt to income ratio. How can that be true if those properties and associated loans belong to a separate business entity?