The DTI ratio calculation is simple, just divide the fixed monthly expenses (rent or mortgage, car payments, student loans, credit card debt, etc) by the borrower's monthly gross income.
A DTI as high as 50% is typically acceptable. It works only slightly differently for income-producing real estate. The lender typically will consider 75% of the gross scheduled rental income, less the total payment (principal, interest, taxes and insurance). If the number is positive, it will be treated as income.
DSCR = net operating income (NOI) / total debt service
To calculate a property's DSCR, divide its annual NOI by its annual debt service payments, which include principal and interest. For instance, a property generating $450,000 of NOI with $250,000 in debt service would have a DSCR of 1.8.
The monthly debt payments included in your back-end DTI calculation typically include your proposed monthly mortgage payment, credit card debt, student loans, car loans, and alimony or child support. Don't include non-debt expenses like utilities, insurance or food.
The following payments should not be included: Monthly utilities, like water, garbage, electricity or gas bills. Car Insurance expenses. Cable bills.
First is the front-end DTI ratio, which measures how much of your gross monthly income will be used on your monthly mortgage payment, including property taxes, mortgage insurance and homeowners insurance.
For real estate investment companies, including real estate investment trusts (REITs), the average debt-to-equity ratio tends to be around 3.5:1. This means that for every dollar owned in shareholders' equity, the company carries $3.50 in debt.
On the other hand, REITs can often take advantage of lower interest rates by reducing their interest expenses and thereby increasing their profitability. Since REITs buy real estate, you may see higher levels of debt than for other types of companies.
Income required for a second home loan
Debt-to-income ratio requirements depend on your down payment size and credit score. Fannie Mae allows a DTI up to 45% with a 660 FICO score and at least a 25% down payment. A 45% DTI means your total monthly payments add up to 45% of your gross monthly income.
As a rule of thumb, your renter's income should be 40 times your rent, which is basically the same as 30% of their total salary.
The 2% rule states that the expected monthly rental income should equal or exceed 2% of the purchase price. Using the same example, a $200,000 rental property should generate a monthly rental income of at least $4,000.
If your home is an investment property, however, lenders will generally allow you to count up to 75% of your expected rental income toward your DTI. This can require additional paperwork and even a special appraisal to ensure that your rental figures are comparable to the ones in the rest of the neighborhood.
Your DTI ratio should help you understand your comfort level with your current debt situation and determine your ability to make payments on any new money you may borrow. Remember, your DTI is based on your income before taxes - not on the amount you actually take home.
A company's debt ratio can be calculated by dividing total debt by total assets. A debt ratio of greater than 1.0 or 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.
FHA loans for higher DTI
FHA loans are known for being more lenient with credit and DTI requirements. With a good credit score (580 or higher), you might qualify for an FHA loan with a DTI ratio of up to 50%. This makes FHA loans a popular choice for borrowers with good credit but high debt-to-income ratios.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.
A REIT is required to pay a dividend of at least 90 percent of its taxable income each year. A dividend is any distribution of cash or property made by a corporation to its shareholders out of its earnings and profits from the current taxable year and then from accumulated earnings and profits from prior years.
Whether or not a debt ratio is "good" depends on contextual factors, including the company's industrial sector, the prevailing interest rate, and more. Investors usually look for a company to have a debt ratio between 0.3 (30%) and 0.6 (60%).
In general, a REIT must derive at least 95% of its gross income from certain passive sources and at least 75% of its gross income from certain real estate related sources. Similarly, at least 75% of the value of a REIT's assets must be attributable to certain real estate related assets.
Monthly Payments Not Included in the Debt-to-Income Formula
Many of your monthly bills aren't included in your debt-to-income ratio because they're not debts. These typically include common household expenses such as: Utilities (garbage, electricity, cell phone/landline, gas, water) Cable and internet.
Add up your monthly debt payments (rent/mortgage payments, student loans, auto loans and your monthly minimum credit card payments). Find your gross monthly income (your monthly income before taxes). Debt-to-income ratio = your monthly debt payments divided by your gross monthly income.
If you're currently leasing an apartment, your monthly rent is typically included in your debt-to-income ratio. Your housing payment is considered a necessary expense, even if you rent.