# How to calculate debt to income ratio for rental income

In this post you will learn :

- How bank calculate your income to debt ratio.
- How to calculate your debt to income ratio.
- What is my debt to income ratio with investment property.

Only recently I realized how easy it is to calculate you debt to income ratio. I've been working with a banker for a few years and this was the last piece of puzzle that I didn't bother to dig into.

# No debt:

Let's start with a simple case. Assume you make 120000$ and have no debt. In this case your monthly income is 120000/12= 10000$.

Well's Fargo allows you to go up to ~43% debt/income ratio.

This means you can borrow with total monthly housing expense of 4300$ (for mortgage and taxes). Assuming taxes is ~1000$, this means you can have a mortgage of at most 3300$.

# With debt.

Now assume you have student loans and a car loan. Assume it is

student loan = 700$/month

car loan = 300$/month

Now you're debt has increases. You still need to be below 43%, so this means

(debt + mortgage + taxes) / income <= 43%

This means your mortgage and taxes needs to be less than 3300$.

# House with investment property

Now assume you have a mortgage. Your income is 200k$ and the mortgage and taxes is 4500$/month.

Your debt to income in this case is

4500$/ 16666$ = 27%

If you have rental income (renting part if your house), this income can be added with a 25% penalty. For example if you generate 4k$ by renting part of your house, the bank will take 75% of it and add to your income.

Income = 16666$ + 4000* 0.75 = 19666$

Now your debt to income is at:

4500$/ 19666$ = 22.8%

## How big an investment property can I buy?

I have been looking at getting a rental property. I already had a pre-approval for 950k$ but the rental property I was looking at was closer to 1.7M$ with income. How was wondering what criteria do bank use to detrrmine if they want to lend you money for real estate.

But running through the numbers, I realize the property is more affordable that I thought since it has an income (it is a duplex).

From the data point of 43% debt to income ratio, we can easily find what is the maximum debt I can take.

$$ \frac{debt}{income + rentalincome} = 0.43$$

$$ debt = (income + rentalincome) * 0.43 $$

debt = 19666$* 0.43 = 8456$

This is assuming no rental income from the new property. With rental income.

## Buying a multi-family

Another option is to buy a multi-family property and live in one of the unit. The income also increases with the rents.

Let's update out scenario:

- income/month = 16666$
- renting primary house = 4000$
- multi-family rental income = 5000$

$$ \frac{debt}{income + rentalincome * 0.75} = 0.43$$

16666$ +( 4000+ 5000)*0.75 = 23416

This means I can afford a total debt of 10062$. Removing the current debt on the primary house, I have 5500$ left I can borrow with. This accounts for a mortgage and taxes of ~1M$.

So it looks like even if I have a rental income the multiplier to your income is not as big as employment income.

## Conclusions

Calculating your debt to income ratio relatively easy. You can easily do this before you go talk with a banker so you're prepared. Also if you plan to buy a house in a hot market (such as NYC,SF,LA,etc...) you need to be able to make quick calculation to see if you can get a mortgage. I hope this post will help you.

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