Does rent count towards the debt-to-income ratio?
Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it's the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.
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.
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.
Mortgage applications: Lenders typically include a consumer's lease payments as part of their debt-to-income (DTI) ratio calculations when assessing mortgage eligibility. Higher DTI ratios can make it more challenging for consumers with significant lease obligations to qualify for a mortgage.
To calculate your DTI, you add up all your monthly debt payments and divide them by your gross monthly income.
Unpaid Rent Is a Bad Debt
(IRS Reg. 1.166-1(e).) Landlords who can report this kind of yet-uncollected rent are operating on an accrual accounting basis. (If you are an accrual basis taxpayer, you report rent as income as it becomes due, not when it's actually paid).
A DTI ratio of 35% or less shows you're managing your debt well. This range may increase your chances of getting loans with competitive rates. It also means you likely have money left over for saving and unexpected expenses. If your DTI ratio falls between 36% and 41%, you may still be in good shape.
Exclude the following from your DTI ratio calculation: Utilities (water, garbage, electricity, gas) Car insurance. Cable and cell phone bills.
Refinance or Consolidate
You can reduce your monthly financial obligations by securing a lower interest rate or extending the loan term. Similarly, consolidating high-interest debts into a single, lower-interest loan can simplify your payments and provide more financial flexibility.
Debt-to-income (DTI) ratio
It's best to keep your DTI ratio at a 40% maximum to qualify for a mortgage, though some lenders make exceptions for DTI ratios up to 50% — especially if borrowers have high credit scores or large down payments.
Does a rental lease count as debt?
For Generally Accepted Accounting Principles (GAAP) purposes, the lease liability is not considered debt. Generally, there should be no impact on a borrower's debt ratios or loan covenants.
They usually account for potential vacancies and maintenance costs. As a result, most lenders will only consider 75% of your rental income. For example, if your rental property generates $1,000 per month, the lender may only count $750 of that income when calculating your mortgage eligibility.
It's a simple math formula: the total of your monthly debt payments divided by your gross monthly income. Usually, it's the “big ticket” payments that make their way into the formula, like credit card bills, installments paid to auto loans and those larger, scheduled monthly payments.
If your monthly income is $2,500, your DTI ratio would be 64 percent, which might be too high to qualify for some credit cards. With an income of roughly $3,700 and the same debt, however, you'd have a DTI ratio of 43 percent and would have better chances of qualifying for a credit card.
Typically, lenders will calculate income using only 75 percent of the average rent. To illustrate, suppose you own a rental property with monthly expenses of $1000 and an average rent of $1,500. You can add $1,125 to the income side and $1,000 to the debt side of your ratio calculation.
Your DTI is a key factor in mortgage approval. Most lenders see DTI ratios of 36% or below as ideal. Approval with a ratio above 50% is tough. The lower the DTI the better.
Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it's the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.
An individual may only deduct passive losses, such as rental losses, to the extent that they have passive income coming in from other sources, including other rental properties.
Renting is NOT a waste of money. It's buying patience until you're ready to buy a home. Just because a mortgage payment might be less than rent doesn't mean it's the right time for you to buy a house. There are a LOT more expenses that come with homeownership than the monthly payment.
- Increase the amount you pay each month toward your existing debt. ...
- Avoid increasing your overall debt. ...
- Postpone large purchases. ...
- Track your DTI ratio.
What is a good credit score but high debt-to-income ratio?
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.
The Federal Reserve tracks the nation's household debt payments as a percentage of disposable income. The most recent debt payment-to-income ratio, from the third quarter of 2024, is 11.3%. That means the average American spends about 11% of their monthly income on debt payments.
Special Considerations For Your DTI Ratio Calculation
If you're getting a mortgage, your DTI ratio calculation will use the actual monthly payment amount for certain types of debt, such as: Mortgage payment. Auto loans. Personal loans.
What is not included in my debt-to-income ratio? Your debt-to-income ratio does not factor in your monthly rent payments, any medical debt that you might owe, your cable bill, your cell phone bill, utilities, car insurance or health insurance.
Let's cut to the chase – yes, a mortgage is considered debt. But (and it's a big but) it's not quite the same as maxing out your credit cards on a shopping spree.
