Debt to Income

What it is

Debt-to-income, or DTI, is the ratio a lender uses to decide whether you can afford another loan. From the funding video, Ross explains it with an easy math example: “They take a certain percentage of the money that you bring in every month. For easy math let’s say that you bring in $5,000 a month. Generally they’re going to take 40% of that. So 40% of $5,000 is $2,000. And they’re going to make sure that the loan payment, the mortgage payment, the principal plus the interest, and your insurance and taxes are going to be less than $2,000 a month. If you make 5,000, 40% is 2,000. That’s your debt to income ratio.”

The FHA version applies that to a 3.5% down purchase. A conventional lender usually wants total DTI at 43-45%. DSCR loan products mostly ignore DTI — they underwrite the property’s rent-to-debt-service ratio, not your personal income.

DTI is a consumer-finance concept. It was designed for homeowners and W-2 earners. That mismatch is where investors hit a wall.

Why it matters

The first rental or two fits inside conventional DTI limits without much trouble. Then the math starts breaking. Rental income only counts at 75% of gross rent under most conventional guidelines — the bank assumes some vacancy and operating costs. Meanwhile, the full mortgage payment on every property you own counts as debt. So for every new rental, DTI goes up faster than the rental income brings it down, even on cash-flowing deals.

This is why conventional lenders stop returning calls somewhere around property five or six.

The insight: DTI is not a wall, it’s a signal. When conventional shuts you out, you’ve outgrown consumer lending. Hard money doesn’t care about DTI. DSCR loan products care about whether the rent covers the debt service on that specific property. Portfolio lenders set their own rules. Private money ignores DTI entirely.

For a W-2 person buying their first house hacking property, DTI matters a lot — keep consumer debt low, don’t finance a new truck the month before you apply, credit cards under 30% utilization. For an operator five or ten rentals in, DTI is mostly a historical number. The tools come from a different shelf.

How it shows up

A common dead-end: someone buys their first rental with a conventional loan, the numbers look great, they go to buy the second one six months later, and the bank declines because rental income hasn’t seasoned long enough to count. Their DTI looks fine on paper, but the underwriter adds the new mortgage without giving them any credit for rent. Deal dies.

The fix is lining up a different kind of lender before the second deal is in contract — not after. A local community bank with a portfolio program. A DSCR originator. A private lender who doesn’t need a tax return. Lining that up before it’s needed saves a closing and a seller relationship.

From the funding video on hard money: “These guys do want to give you money. That’s how they make a living. They make a living by writing loans for you. And that’s an important thing to understand because when I was first starting out, I felt like I needed to be on my knees begging people to give me money. But the reality is they need you to make their business make money by writing loans.”

Related

hard money, dscr loan, partnerships, house hacking, funding, leverage