When using bank financing to buy rental property, there can be many steps you need to complete through out the process. One of those steps is knowing what the debt to income ratio is on the property you plan to purchase. The debt to income ratio looks at how much of your income is going to paying the debt on the rental. The lower the percentage the higher likelihood the loan will get approved. Let's talk about 3 key items to be aware of when it comes to DTI.

DTI Requirements

Most banks will want to see the debt to income ratio at 45% or lower on a rental property. This ensures that there will be sufficient funds to pay the mortgage each month. Your bank is evaluating risks and this will be a big deciding factor on if the numbers work. To arrive at the DTI ratio, simply divide you monthly mortgage payment by the total rent of the property. Example: Mortgage payment is $1,000 and the rent is $2,500. 1,000/2,500= 40% DTI ratio.

Rental Income Inclusion

A big benefit to you qualifying for a loan with a rental property is that the bank will use the rental income to help qualify. Something to note though, usually it is only 75% of the total rent because the bank will factor in vacancy and maintenance costs.

Credit Score Impact

Having a strong credit score can not only help you to get a lower interest rate, but it can also help you when it comes to DTI. If you have a high credit score a bank may be willing to approve a DTI ratio that is higher than 45% since that will indicate a lower risk to the bank.

Knowing how to arrive at these numbers before taking a deal to the bank will give you confidence on the outcome of an approval!