What is your Debt-to-Income Ratio (DTI)?

On a weekly basis, I am asked about the basics of measuring debt-to-income. Even the most sophisticated among us struggle with this because often we have so much going on with debt we make it harder than it needs to be. Your debt-to-income ratio (DTI) is the total of your monthly debt payments divided by your gross monthly income. (Obvious to many, but not so obvious to many too.)

This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed. To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.

An easy calculation

For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly "debt payments" are $2000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6000, then your debt-to-income ratio is 33 percent. ($2000 is 33% of $6000.) This may seem grossly simple – but I want to provide you with an easy example to illustrate the concept.

Any loan officer can also help you calculate your DTI. There are lenders who will only go to a maximum of 43% (debt as a percentage of gross income). I have talked to that same large bank and they, for investors, can go as high as 49.99%, and even include a portion of the rent projected for your new investment home as part of your income.

You don't have to be a DTI expert

The lower the DTI the better, and most likely you will have slightly better terms on your loan, the lower your DTI is. Of course, different banks will have a different policy.

You don’t have to become a DTI expert, nor even look at your FICO score. The bank will help you get all of this information when you contact them. Therefore, this is not something you need to address before you begin exploring if you are in a position to begin investing in single-family rental homes.

Taking the next steps

One of the best next steps is to get pre-qualified for a loan, (which costs you nothing financially) and see where you stand.  There are some great banks and mortgage companies out there that can help you get a good feel for where you are from Wells Fargo to All Western Mortgage. If one company tells you that you are out of luck - get a second and third option. 

The loan officer should be an expert in making investor loans on single-family home rentals. Another rule of thumb is to make sure that ultimately, they can make loans in all 50 states or have relationships that will serve that purpose. The loan officer will help you fill out the loan application and in many cases, fill it out for you over the phone. They will then let you know if you are pre-qualified to get a loan.

Good to know

If you buy a house (for example) for $190,000 and you put 20% as a down payment, the loan will be $152,000. To qualify for a loan of $152,000, does not require you to be a very high earner.