• Debt-to-income (DTI) calculations help landlords assess tenant affordability.
• DTI is calculated by dividing monthly debt payments by gross monthly income.
• A higher DTI indicates a greater risk of payment delinquency.
• Landlords should verify income documents to ensure accurate DTI calculations.

Understanding Debt-to-Income (DTI)

Debt-to-income ratio, or DTI, is a key metric for landlords screening tenants. It measures the percentage of a tenant's gross monthly income that goes toward paying debts, including credit cards, student loans, car payments, and other obligations. By calculating DTI, landlords can assess a tenant’s ability to meet their rent obligations.

Landlords typically aim for tenants with a DTI below 43%. This threshold aligns with guidelines from the Consumer Financial Protection Bureau (CFPB), which considers DTI above 43% a sign of financial stress. While this guideline originates from mortgage lending, it serves as a useful benchmark for tenant screening.

Why DTI Matters for Landlords

A high DTI doesn't automatically disqualify a tenant, but it signals potential risk. For example, a tenant with a DTI of 50% is likely allocating half their income to debt payments, leaving little room for unexpected expenses. Such tenants may struggle to stay current on their lease if they face financial setbacks.

Conversely, a tenant with a DTI of 30% has more financial flexibility. They are likely to manage rent payments reliably, even during economic downturns or personal emergencies.

Common Misconceptions About DTI

Some landlords mistakenly believe that DTI is the same as a credit score. While both metrics assess financial health, they serve different purposes. A credit score reflects payment history and credit utilization, while DTI focuses solely on income versus debt obligations.

Another misconception is that DTI calculations should exclude rent. However, including rent in DTI provides a more accurate picture of a tenant's financial commitments.

How to Calculate DTI from a Credit Report

Calculating DTI involves several steps. Landlords must gather accurate data on a tenant's monthly debt payments and gross income.

Step 1: Gather Required Documents

To calculate DTI, landlords need the following documents:

• Credit report (from a service like Experian or TransUnion)
• Pay stubs or bank statements (to verify income)
• Proof of other debts (e.g., loan statements, credit card bills)

Landlords should request these documents during the tenant screening process. Ensure all documents are current and verified.

Example Document Checklist

• Credit report: Obtain a recent credit report from a reputable agency. Ensure it includes all tradelines and payment history (learn more about credit report tradelines).
• Pay stubs: Request the most recent pay stubs, typically from the last three months. Verify employment details and gross income.
• Bank statements: Ask for bank statements covering the last three to six months. Look for consistent income deposits and sufficient funds.
• Loan statements: Collect statements for all outstanding loans, including mortgages, auto loans, and student loans.
• Credit card statements: Gather statements for all credit cards, noting minimum monthly payments.

Step 2: Identify Monthly Debt Payments

A tenant's credit report lists all debts and monthly payments. Landlords should identify the following types of debt:

• Credit card minimum payments
• Student loans
• Auto loans
• Personal loans
• Mortgage or rent payments (if applicable)

Add up all monthly debt payments to get the total monthly debt.

Example Debt Calculation

Suppose a tenant has the following monthly debt payments:

• Credit card minimum payment: $100
• Student loan payment: $200
• Auto loan payment: $300
• Personal loan payment: $150
• Current rent payment: $1,200

Total monthly debt = $100 + $200 + $300 + $150 + $1,200 = $2,950

Step 3: Verify Gross Monthly Income

Income verification is crucial for accurate DTI calculations. Landlords should request recent pay stubs or bank statements to confirm gross monthly income.

For self-employed tenants, landlords may need tax returns or profit-and-loss statements. Ensure income documents are recent and verified.

Example Income Verification

• Gross monthly income: $5,000 (as shown on pay stubs)
• Bank statements confirm consistent income deposits.

Step 4: Perform the DTI Calculation

To calculate DTI, divide the total monthly debt by the gross monthly income. Multiply the result by 100 to get a percentage.

For example, if a tenant has $2,950 in monthly debt and a gross income of $5,000, the DTI calculation is:

($2,950 ÷ $5,000) × 100 = 59%

Interpreting DTI Results

Understanding how to interpret DTI results helps landlords make informed decisions.

Ideal DTI Range for Tenants

Landlords should aim for tenants with a DTI below 43%. Tenants within this range are likely to manage their rent obligations effectively.

Tenants with a DTI between 43% and 50% may still be viable, but landlords should proceed with caution. These tenants might face financial strain during economic downturns.

Example DTI Scenarios

• DTI of 35%: A tenant with a $3,000 gross monthly income and $1,050 in monthly debt has a DTI of 35%. This tenant is likely financially stable.
• DTI of 45%: A tenant with a $3,000 gross monthly income and $1,350 in monthly debt has a DTI of 45%. This tenant may struggle during economic downturns.
• DTI of 60%: A tenant with a $3,000 gross monthly income and $1,800 in monthly debt has a DTI of 60%. This tenant is at high risk of payment delinquency.

High DTI Red Flags

A DTI above 50% is a significant red flag. Tenants in this range are at high risk of payment delinquency. Landlords should consider alternative screening methods or require a co-signer.

Example Red Flag Scenario

A tenant with a $4,000 gross monthly income and $2,500 in monthly debt has a DTI of 62.5%. This high DTI indicates significant financial strain, making them a risky tenant.

Using DTI Alongside Other Metrics

DTI is just one piece of the tenant screening puzzle. Landlords should also consider:

• Credit score (learn more about VantageScore vs FICO vs ResidentScore)
• Payment history
• Employment stability
• References from previous landlords

By combining DTI with other metrics, landlords can make well-rounded tenant evaluations.

Example Comprehensive Screening Checklist

• Credit Score: Ensure the tenant has a credit score above 620.
• Payment History: Verify the tenant has no late payments in the last 12 months.
• Employment Stability: Confirm the tenant has been employed for at least one year.
• References: Contact previous landlords to confirm the tenant met their rent obligations.

Organizing Tenant Records with TenantFlow

Efficient record-keeping is essential for landlords managing multiple properties. TenantFlow offers a comprehensive solution for organizing tenant records, leases, and documents.

With TenantFlow, landlords can securely store tenant credit reports, income verification documents, and lease agreements in one centralized location. This streamlines the screening process and ensures all necessary records are readily accessible.

Example TenantFlow Features

• Tenant Records: Store contact information, lease history, emergency contacts, and document attachments.
• Lease Lifecycle: Manage drafts, e-signed leases (DocuSeal), renewals, terminations, and lease document vaults.
• Document Vault: Search across leases, tenant documents, inspections, and maintenance records with custom categories.
• Financial Reporting: Track income and expenses with category tagging and tax-ready exports.

Common Mistakes to Avoid When Calculating DTI

Accurate DTI calculations require attention to detail. Landlords should avoid the following common mistakes:

Ignoring Rent in DTI Calculations

Some landlords overlook rent when calculating DTI. However, including rent provides a more accurate picture of a tenant's financial commitments.

Example Mistake Scenario

A landlord calculates DTI without including rent, resulting in an underestimation of the tenant's financial obligations. This oversight can lead to payment issues.

Using Net Income Instead of Gross Income

DTI calculations should use gross income, not net income. Gross income includes all earnings before taxes and deductions.

Example Mistake Scenario

A landlord uses net income for DTI calculations, resulting in an inflated income figure. This error can lead to overestimating a tenant's affordability.

Overlooking Non-Reported Debts

Not all debts appear on credit reports. Landlords should ask tenants about non-reported debts, such as utility bills or medical expenses.

Example Mistake Scenario

A landlord relies solely on the credit report for debt information, missing significant non-reported debts. This oversight can lead to an inaccurate DTI calculation.

FAQ

How often should landlords check tenant DTI?

Landlords should calculate DTI during the initial screening process. For long-term tenants, periodic checks can ensure financial stability.

Can landlords use DTI to justify rent increases?

No, DTI is not a justification for rent increases. Rent increases should be based on market conditions and lease agreements.

What if a tenant refuses to provide income documents?

Landlords should have a clear policy on document requirements. If a tenant refuses to provide necessary documents, consider it a red flag and proceed with caution.

How does TenantFlow help landlords manage tenant records?

TenantFlow provides a secure, organized platform for storing tenant records. Landlords can easily access lease documents and financial reports in one place.

Related reading: Landlord Walkthrough Credit Report Tradelines.