Debt to Income (DTI)

Debt to Income (DTI)

What is Debt to Income?

DTI. In many traditional loans, it's probably one of the most important criteria that can end up tanking deals if yours is not stellar. Debt to Income is a ratio that measures the amount of money a borrower owes versus the amount of money a borrower earns and the ratio is usually represented on a monthly basis.

Debt is any payment that is owed monthly may be considered on the debt side of the equation. Some of the items included can be:

  • Home equity loans
  • Mortgages
  • Student loans
  • Credit card bills
  • Lease payments
  • Child support
  • Alimony

Income is your total gross income you earn over the course of the year, including any nontaxable income. This can include:

  • W-2 income (from any full time roles)
  • 1099 income (from any contractor gigs)
  • Average monthly income (if you're self employed)
  • Real estate rental property income (if you're an experienced property investor)
  • Nontaxable income (inheritance, gifts)

How to calculate the Debt to Income Ratio?

The Debt to Income ratio can be calculated in the following way:

\[ { \sum (Monthly \, debt \, payments) \over Annual \, gross \, income * 12 } \]

What is considered a good DTI ratio?

A good DTI ratio really depends on your situation. If you know how to appropriately and responsibly use debt, having a higher DTI may help you accomplish your goals faster. If you're just getting started with property investing, having a manageable DTI ratio will help you access the financing you need.

Generally, here is a good rule of thumb:

  • 0.35 or lower - Excellent - This may mean you typically have enough money left over for spending after paying for all of your obligations.
  • Between 0.35 and 0.50 - Fair - You are making enough income to cover your debt. You may want to lower your DTI in the event there are unplanned expenses.
  • 0.50 or higher - Danger - Depending on your situation, you should take action in improving your DTI. Lenders may view you to be a riskier borrower.

If you're looking to get a mortgage, Fannie Mae and Freddie Mac release guidelines specifying that borrowers cannot have higher than 0.50 DTI.

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