In this article, we’ll explain everything you need to know about your debt-to-income ratio, or DTI ratio, one of the most important metrics that lenders look for when you apply for a RenoFi Renovation Home Equity Loan.

What is Debt-to-Income Ratio?

To put it simply, your DTI is a comparison between how much you owe and how much you make on a monthly basis. Your DTI is one of the most important metrics that lenders consider when you apply for a loan. Your DTI ratio is expressed as a percentage: your combined debts divided by your combined monthly income.

What is Debt-to-Income Ratio Used For?

Lenders use DTI to determine whether you’re eligible for loans or lines of credit. A low debt-to-income ratio shows lenders that you’re more likely to pay back a loan or line of credit on time and in full, whereas a higher DTI shows lenders you’re more at risk of defaulting.

Auto lenders, mortgage lenders and renovation loan lenders all use this metric, DTI, to judge whether you can afford a loan, and it’s one of the most important factors they look at when you apply.

What’s Included in Debt-to-Income?

Your DTI ratio doesn’t include all debts or all incomes - so read on to see exactly what’s included.

Debt

A good question to ask yourself to determine whether a debt is included in this calculation is: Is this payment required and is it recurring?

If you owe your sister $20 for pizza, your lender doesn’t need to know that. If you owe $5,000 in credit card debt - you wouldn’t include $5,000 in the calculation - you’d just include whatever your minimum monthly payment is - what’s required.

Here is a list of debts that your lender will consider when calculating your DTI:

  • Rent payments
  • Mortgage payments
  • Homeowner’s insurance payments
  • Monthly real estate tax payments
  • Monthly car payments
  • Monthly minimum student loan payments
  • Monthly minimum credit card payments
  • Monthly minimum personal loan payments
  • Monthly minimum child support or alimony payments

Here is a list of debts that your lender will not consider when calculating your DTI:

  • Food and entertainment costs
  • Utilities
  • Car insurance
  • Health insurance
  • Wi-fi, cable or cell phone bills

If you’re unsure whether a certain item will be considered in this calculation, contact your lender to check.

Income

The income portion of this DTI equation is a bit more straightforward.

Here is a list of income sources that your lender will consider as part of your gross income:

  • Salary
  • Wages
  • Tips and bonuses
  • Pension
  • Social Security
  • Child support and alimony

Remember to include the gross monthly income, and gross monthly debt, of anyone whose name will be on the loan - not just yourself.

How Do You Calculate Debt-to-Income Ratio?

Once you know your total monthly debt payments and your annual income, enter it into the RenoFi DTI Ratio calculator to see your DTI ratio.

Annual income (pre-tax):
Total monthly debt payments:

Your DTI Ratio:
40%

While this calculator is an accurate measure of your DTI, make sure to note that your lender will ultimately determine your DTI ratio based on their own metrics, so if you have specific questions that will affect your inputs, contact them.

What is a Good Debt-to-Income Ratio?

The lower your DTI the better if you’re looking to qualify for any type of loan, including a RenoFi Loan.

However, the percentage is different for all loan types and lenders.

For RenoFi Loans specifically, if your DTI ratio is above 43%, lenders offering RenoFi Loans are unlikely to approve your application. And remember, the 43% includes the payment for the RenoFi Loan.

In general, most lenders consider DTI ratios below 43% to be optimal. You’ll need a DTI of 50% or less to qualify for most conventional loans outside of RenoFi Loans, but it depends on the loan type and the lender.

How Do You Lower Your Debt-to-Income Ratio?

If your DTI is too high to qualify for a RenoFi Loan or other type of loan/line of credit, all hope is not lost. There are steps you can take to improve your DTI so you can qualify for the financing you need.

Here are some of the top tips to improve your DTI Ratio:

  1. Pay off larger debts faster
  2. Refinance or consolidate loans
  3. Put off any major purchases
  4. Transfer debt to a zero-interest credit card

Basically, you can try to decrease your debt, or you can try to increase your income.

If you have more specific questions about DTI ratios and how they relate to RenoFi Loans, contact a RenoFi Advisor today.