Why DTI Matters — Even for Doctor Mortgage Programs

Your debt-to-income ratio (DTI) is a major part of paying for a mortgage. Even if you’re getting a physician loan, it’s going to matter. However, this can be challenging for medical professionals like doctors and dentists, who usually have a high amount of student loan debt.

Let’s take a look at how physician loan options are impacted by your DTI and what it means for getting a home loan.

What is DTI?

Your debt-to-income ratio is an expression of how much of your monthly income goes toward making debt payments. Mortgage lenders use it as a way to evaluate whether you might be able to make your monthly payments on time and whether you might potentially default in the future.

To determine DTI, add up your monthly minimum payments for all of your loans, including credit cards, personal loans, student loans, car loans and other debt. Then, divide that amount by your monthly gross income. It looks like this:

[Total of all monthly debt payments] ÷ [Gross monthly income] = DTI

Why DTI matters for physician loans

Even with a doctor mortgage loan, a lender wants to know that you can afford the loan. In general, when you start approaching a 50% DTI ratio, your ability to repay all your bills, including your mortgage loan balance arises.

If you’re looking into homeownership, understanding how DTI impacts physician home loans is important. You might get special underwriting treatment as a medical doctor through one of these loan programs. For example, you might not need to pay private mortgage insurance (PMI), or might be offered lower down payment requirements, but a lender still wants to know how your DTI impacts the rest of your personal finances to make an informed home loan application decision.

The “ideal” DTI number

For conventional mortgages and for government-backed programs like FHA loans and VA loans, it’s common for lenders to prefer a DTI ratio of no more than 43%. However, some lenders specialize in qualifying borrowers with higher DTIs.

For home buyers, however, getting the best rate often comes when you meet the 28/36 rule. This approach looks at your DTI in terms of adding your mortgage payment to the equation.

With the 28/36 qualifying ratio, lenders look to see that your mortgage payment is no more than 28% of your gross income, while your total debt — including the new monthly mortgage payment — shouldn’t exceed a DTI of 36%. Meeting this requirement can potentially lead to a lower interest rate for new homeowners.

Examples of DTI in action

Let’s say you make $5,000 as a medical resident and have the following monthly payments:

• Credit cards: $450
• Student loans: $500
• Car loan: $650

In this situation, you’d divide the total debt payments ($1,600) by your monthly income ($5,000) to get 0.32. In this scenario, your DTI is 32%.

If you decide you want to buy a new home, you might be looking at a monthly payment of $1,500. This pushes your DTI ratio up to 0.62, or 62%.

As you can see, this is a high debt-to-income ratio far outside the preferred qualifying ratio and even puts you well above the 50% DTI threshold.

With a monthly income of $5,000, to meet the qualifying ratio, you’d want to limit your mortgage payment to $1,400 and your total debt to $1,800, meaning it would be important to get other debt payments down to $400 total.

Another approach is accepting the potential for higher interest rates and aiming for a total DTI of 43% when applying for a mortgage. In that case, your total monthly debt payments, including your mortgage payment, would need to be no more than $2,650.

The role of student loans in DTI

One of the biggest issues that impacts physicians is medical school debt. Student loan payments are considered in the same category as any other type of loan. So, your monthly student loan payments are included in your DTI calculation.

Because student loan amounts for new doctors are often high, this can result in a high monthly payment that leads to a much higher debt-to-income ratio. It can be difficult to get a traditional mortgage or a physician loan in this situation.

Strategies to improve DTI before applying for a physician loan

If you hope to use a doctor loan program to buy real estate, including a primary residence, you might want to improve your DTI before you apply. As a first-time home buyer, you can increase your chances of getting approved when you pay down some of your debt.

Here are some ways to improve your eligibility for a loan aimed at healthcare professionals:

• Avoid lifestyle creep. Even as your income increases, try to avoid letting your expenses rise as your income does. By keeping costs low, you can reduce the chances that you’ll end up in debt later.
• Pay down debt. Because debt payments are the main contributor to DTI, paying down some of your debt can be a big help. Make a plan to start tackling your debt so your monthly payments are lower.
• Refinancing current loans. In some cases, depending on the loan terms, you might be able to reduce your DTI when you refinance to a longer term with a lower monthly payment. Because your DTI ratio is based on your payments and not the loan amount, lowering your payment can make a big difference. Consolidating variable-rate credit cards with fixed-rate loans might also help.
• Increase your income. Another way to reduce your DTI is to make more money. When you have a higher income, your monthly payments on debt take up a lower percentage of your available income.
• Choose the right repayment plan for student loans. Check to see what might be available to you. If you qualify for income-driven repayment or if you can get a longer Direct consolidation loan, you might be able to lower your monthly student loan payments to something that brings you in line with the preferred DTI.

How to get a loan if your DTI is too high

It can be challenging to get a physician mortgage loan if your DTI is too high. However, there are some things you can do to improve your chances.

If you’re a resident but have a new employment contract coming with a much higher income, that might be helpful. Some doctor loan programs for dentists, medical doctors and veterinarians will use a future contract as income, rather than your current income.

In some cases, you might be able to make a bigger down payment to reduce your mortgage payment, bringing your DTI ratio more in line with requirements.

If you’re interested in learning more, you can fill out our physician lender form to find out about your options.