Debt-to-Income (DTI) Ratio Calculator
Debt-to-Income Ratio (DTI Ratio)
When evaluating an investment property, using rental metrics and analytics is crucial for making informed decisions. Metrics provide a clear picture of a property's current or potential financial performance, helping investors gauge profitability and mitigate risks.
Debt-to-income ratio is one metric that can help investors optimize their portfolios, ensuring they make the most out of their real estate ventures. Using an online calculator is a simple and efficient way to assess your overall debt health.
Key Takeaways
- Debt-to-income ratio (DTI ratio) measures how much of your gross monthly income goes toward monthly debt payments.
- DTI ratio is useful when preparing to apply for a mortgage or other real estate financing.
- A DTI calculator uses inputs like total monthly debt payments and gross monthly income to calculate your debt burden as a percentage.
- By using REI Grove's DTI ratio calculator, you can better understand your loan eligibility and identify ways to improve their financial position before applying.
What is a Debt-to-Income Ratio?
Simply put, your debt to income (DTI) ratio is a percentage that signifies how much of your monthly gross income goes toward monthly debt payments. In real estate, this is most likely to involve paying off mortgage debts, though we will discuss later in this article the importance of also considering any other personal loans and outstanding debts into your calculation.
For example, if you are dedicating a quarter of your gross monthly income toward paying off your outstanding debts, that is a DTI ratio of 25%. Calculating your DTI ratio will not only give you a new perspective on your current debt burden, but it can also help you determine whether you are qualified for any new loans.
DTI Formula
The formula for debt-to-income ratio is as follows:
DTI Ratio = (Total Monthly Debt Payments / Gross Monthly Income) * 100
Using these variables, you will be able to keep track of the kind of financial habits you need to maintain to be eligible for certain loans.
DTI Formula Breakdown
| DTI Component | What It Means | Formula or Example |
|---|---|---|
| DTI ratio | The percentage of gross monthly income that goes toward monthly debt payments. | DTI Ratio = (Total Monthly Debt Payments / Gross Monthly Income) * 100 |
| Total monthly debt payments | The sum of monthly payments toward outstanding debts. | Mortgage, student loans, car payments, credit cards, personal loans, and other debts |
| Gross monthly income | Income earned during the month before deductions. | Income before taxes, expenses, and debt payments |
When to Use DTI Ratio
While the percentage you get from this formula can be a good indicator of your overall financial health, the primary use for this data is to help you acquire a loan. If your ratio is low and looks good to a lender, you may be able to take on additional debts and monthly payments without too much financial stress. If your numbers do not look ideal, the number is still valuable in helping you determine what factors you may be able to adjust to improve it.
Common Uses for DTI Ratio
| Use Case | Why DTI Ratio Matters |
|---|---|
| Preparing for a mortgage application | Lenders may use DTI ratio to evaluate whether a borrower can manage another loan payment. |
| Reviewing personal debt burden | DTI ratio can show how much monthly income already goes toward debt. |
| Comparing loan readiness | A lower DTI ratio may suggest stronger loan eligibility. |
| Improving financial health | Borrowers can use DTI ratio to identify whether they should increase income or reduce debt. |
| Evaluating borrowing capacity | DTI ratio can show whether additional debt may create too much financial stress. |
How to Use the DTI Calculator
REI Grove's debt to income ratio calculator is designed to help you quickly assess your eligibility for certain loans by comparing your current debts to income level. While on its surface the DTI ratio formula may seem straightforward, there are many considerations for the included variables to ensure it is a precise and usable calculation. Let's get into what is included in each of the equation's variables.
There are only two inputs involved in the DTI ratio calculation:
- Total monthly debt payments
- Gross monthly income
Your total monthly debt payment is the sum of all your outstanding debts. If you own a home, your mortgage loan is likely the largest contributor towards your debt. However, your outstanding debts also include student loan payments, car payments, credit card debt, personal loans, and any other kind of debt you may have. When lenders begin the underwriting process, they evaluate you holistically as a borrower. Even if your mortgage is paid off, your DTI ratio could indicate that you're a riskier borrower if you have substantial bad debt, such as credit card debt or personal loans.
The other input in this equation, gross monthly income, is much more straightforward. The denominator of the fraction should include all of the income that you earn in that respective month, excluding any overhead such as taxes, expenses, or—most importantly—debt payments.
Outputs
The output in this equation is your DTI ratio, which will tell you the ratio of your gross monthly income that went toward paying off any outstanding debts.
How to Interpret Your DTI Ratio
DTI ratio may be used as an assessor for your current financial health. A relatively low DTI ratio communicates to you as well as potential lenders that your income is sufficient and you are responsible enough to cover your ongoing debts, making you a more ideal candidate for a loan. A higher ratio may communicate either that you are not making sufficient income to cover your debts or are not allocating enough of your monthly income toward relieving your debts. Either way, the percentage you produce is one that is likely to be significant to any lenders.
According to Investopedia, the maximum DTI ratio that most lenders will accept for mortgage applicants is 43%; however, most lenders prefer less than 36%.
There are two ways to improve your DTI ratio: You can either increase your income or decrease your debt. If you're looking to lower your ratio, prioritize eliminating high-interest debts by making more than the minimum payment on your mortgage payments. This could come at the expense of other monthly bills, but you'll be able to limit the accrual of interest and minimize your total outstanding debt. Be sure you are making minimum credit card payments each month and limit other types of high interest debt like personal loan debt.
Lastly, remember that mortgage lenders look at the holistic picture of your financial situation. Even if you could reasonably take on a mortgage payment, other factors like your credit history or property taxes payment history could interfere with your ability to secure a new loan.
DTI Ratio Interpretation at a Glance
| DTI Result | What It May Suggest | What to Consider |
|---|---|---|
| Lower DTI ratio | A smaller share of gross monthly income goes toward debt. | This may make a borrower look stronger to lenders. |
| Higher DTI ratio | A larger share of gross monthly income goes toward debt. | This may suggest more financial stress or reduced loan eligibility. |
| Less than 36% | Often preferred by many lenders. | Lending standards vary by lender and loan type. |
| Up to 43% | Often cited as the maximum many lenders accept for mortgage applicants. | Other factors, such as credit history and property taxes, may still affect approval. |
Conclusion
As we have seen, the DTI ratio equation that looks simple on its surface has a number of considerations. You can access REI Grove's DTI ratio calculator and other real estate resources to help determine your eligibility for a future loan or investment below.
FAQs
What is debt-to-income ratio in real estate?
Debt-to-income ratio (DTI ratio) is a percentage that shows how much of your gross monthly income goes toward monthly debt payments.
How do you calculate DTI ratio?
The formula for DTI ratio is (Total Monthly Debt Payments / Gross Monthly Income) * 100.
What inputs do I need for a DTI ratio calculator?
To calculate your DTI ratio, you'll need your total monthly debt payments and gross monthly income.
What counts as total monthly debt payments?
Total monthly debt payments include your mortgage, student loans, car payments, credit card debt, personal loans, and any other outstanding debts.
What counts as gross monthly income?
Gross monthly income is the income you earn in a month before taxes, expenses, and debt payments are subtracted.
What is a good DTI ratio?
Most lenders prefer a DTI ratio of less than 36%, though many will accept up to 43% for mortgage applicants.
Does a high DTI ratio mean I won't qualify for a loan?
Not necessarily. A high DTI ratio may make lenders view you as a riskier borrower, but approval also depends on other factors like credit history and property tax payment history.
How can I improve my DTI ratio?
You can improve your DTI ratio by increasing your income or decreasing your debt, such as by paying down high-interest debt faster.
Should lenders only use DTI ratio to evaluate borrowers?
No. Lenders typically evaluate borrowers holistically, also considering credit history, payment history, and other financial factors beyond DTI ratio alone.