It seems like it's most common to use a 33% rent-to-income ratio to screen tenants, but debt-to-income seems like a smarter way to screen tenants to me. A tenant may have a good RTI, while having a poor DTI. Isn't it smarter to use DTI?
What debt-to-income ratio should be used? I expect it can be a little higher than the typical 33% debt to income ratio. What is everybody using?
That's interesting. I've always done RTI vs DTI. It makes sense that if a person has a good RTI they might have a poor DTI ratio. I feel the DTI ratio is more about money management vs just how much a person makes and it might be harder to find out and verify. With RTI, there are less variables since theoretically, I had set the rent and just need to verify income. With DTI, I would need to find out what debt a person has and then figure out how to verify that. Some of it might be privileged information. Unsure how that would work.
Credit reports should include reported debts, including credit and loans, I believe. I can't imagine there's a way to get unreported debts and that would have to be left out of the equation probably.
But yes, someone could have a high paying job, but have a pile of student loans, a new pickup and boat to match that were both bought with loans. Any number of things could make someone with a good RTI have a bad DTI, which I think should be more important to landlords.
I think as landlords, we assume the renter's DTI is ‘reasonable' since the banks are doing much more in-depth screening than we are. No bank is going to give someone a loan that'll put them so high in DTI that they can't afford rent.
Of course, I do always look at prospective tenants’ debt to see how much of it is ‘good’ debt vs ‘bad debt’. Education loans are huge, but are better than seeing a high car loan when they make limited salary.
3 times income to rents along with a good credit score is simply easier and gets the job done.