Calculating Debt-To-Income to see how much income is needed

[James Orr]

Lenders...

I have a question about how you all calculate Debt-To-Income so I can work backwards and determine how much income someone would need to qualify for a loan.

We are writing some software to model real estate portfolios and want to make sure we're calculating Debt-To-Income to be able to tell people, you'd need to make this much money to be able to purchase these rental properties and show them charts like this one.

So, here are my questions:

1. What is included in the DTI calculation? Rent, Mortgage Payments, HOA?, Utilities?, Property Taxes?, Property Insurance?

2. Are you using 75% of rent? Or, some other percentage?

3. Should we be using 50% DTI ratio? Or something else?

Here's our formula that we used to make the above chart:

MinimumGrossMonthlyIncomeRequired = ((MonthlyRent*.75) - MortgagePayment - (HOA/12) - MonthlyUtilities - (PropertyTaxesDollar/12) - (PropertyInsuranceDollar/12))/-.5

Thanks in advance.

[Jeff Dulla]

@James Orr

1. Everything you mentioned but Utilities. Also credit card minimum payments, student loans, car loans, leases, child support, alimony, etc. 

2. Depends on the situation. If you are talking about a seasoned investor with two years of tax returns there is a formula used based on their schedule E. If you are talking for a new investor, they will take a fully executed lease and proof of deposit from renter - take 75% of that for monthly income. If you are buying a brand new investment property they will typically have the appraiser do a rent schedule of comparable rentals - take the average rent they come up with and use 75% of that for qualifying. 

3. I would use 45%. 50% could go through but is going to be the exception and not the rule. 

Is the point of the formula to get close to the actual debt to income ratio the underwriter is going to use to qualify? If so, it is leaving out all debts outside of the singular real estate transaction. 

Hope this helps.