Debt to Income Ratio (DTI) is a metric that compares your total debt payments to your annual income. It is used by banks to assess your ability to repay a mortgage.
Generally, banks prefer a DTI ratio of below 6-8 times your annual income. This means that your total debt payments should not exceed 6-8 times your annual income. For example, if you have an income of $50,000 per year, your total amount of debt should not exceed $300,000 to $400,000 in the bank’s view. A high DTI will make it difficult for you to obtain a home loan, as it may indicate to the bank that you’re at a higher risk of defaulting on the loan.
To reduce the influence of DTI on your borrowing ability as you grow your property portfolio, try these methods. First, go for loans that include both principal and interest. This helps you pay down a portion of debt each year. If you’ve picked a good investment, the tenant’s rent will likely cover your property costs. Second, choose investments that not only cover expenses but also generate a yearly profit. This profit increases your income and makes it easier to borrow more money. Banks prefer investors who understand the importance of having a positive cashflow.
It is important for you to carefully consider your DTI before taking on additional debt and, if need be, reduce your debt or increase your income in order to increase the chances of being approved for your home loan. If you would like to learn more about the DTI, please feel free to reach out below and we can discuss this in more detail.
Disclaimer: The information provided in this article is solely the author’s opinion and not investment advice – it is provided for educational purposes only. By using this, you agree that the information does not constitute any investment or financial instructions. Do conduct your own research and reach out to financial advisors before making any investment decisions.
