The rent-to-income ratio is one of the criteria used to calculate your annual gross income when determining whether you qualify for a mortgage. This ratio accounts for the ratio of your gross income to your monthly housing expenses, including rent. If a landlord has specific income restrictions, they may require a higher ratio than 36-40%. To determine your ratio, you need to look at part of your credit report, which will have details on the total gross income you earn and the amount of monthly debt you have.
Recently, there has been much focus on rent-to-income ratios (see: Rental discrimination). Many tenants are under the impression that landlords discriminate against them because they can’t afford their rent. Most landlords tend to prefer tenants who can afford their rent. A rent-to-income ratio is used to help them decide if they can afford a potential tenant and determine how much rent to charge them.
How to calculate the rent-to-income ratio
One of the primary ways a landlord determines whether or not to approve your housing application is by determining your “rent-to-income ratio.” This ratio is the amount of money you make before taxes or deductions (excluding any gifts or inheritances) divided by the rent you expect to pay. The formula used to calculate this number is as follows:
- Total Income minus
- Total Expenses divided by
- Total Income minus
- Total Expenses minus
- Total Housing Costs.
The housing costs are the most important factor in this equation since every landlord wants to ensure that you have enough money for basic living expenses.
Automate rent reminders and late fees
Not enough landlords understand that their tenant’s rent can be paid late each month. The more a landlord knows about the effects of late payments, the better they will be able to help their tenants avoid late fees in the future. Late payments can be a problem many landlords face. Oftentimes, tenants will fall behind on their rent due to medical crises, job loss, or even simple forgetfulness.
Getting a lease guarantor / co-signer
The rental market is notoriously competitive, and securing a lease can be a lengthy, complicated process. Your landlord may ask for references, a credit check, and proof of income, among other things. But securing a lease guarantor (someone who agrees to guarantee the lease and financial responsibility for the rent) is especially helpful when securing an apartment in a tight market. When it comes to finding an apartment, no landlord is thrilled to learn their apartment is already 100% leased, and they might feel a little desperate if they find out there’s a tenant who has decided not to move in after all.
Pros and cons of using the rent-to-income ratio
The rent-to-income ratio that landlords should know helps determine if a tenant will be able to pay rent. The rent-to-income ratio that landlords should know is very closely related to the gross income of tenants. The rent-to-income ratio that landlords should know, also called the gross rent multiplier, is the relationship between annual gross rent and gross annual income.
The rent-to-income ratio, also known as (RTI), is a fairly complex ratio that measures the relationship between a household’s gross monthly income and the amount it spends on housing. Determining the RTI helps determine how much of a risk a landlord should assume when renting to an individual or family.
The rent-to-income ratio (R/I ratio) is a commonly used guideline used by landlords to determine the affordability of a potential tenant’s income level for a given property. Two basic factors determine the amount of income of a potential renter a lender will consider: gross income and debt-to-income (DTI) ratio. Gross income is the total income a person receives before taxes. It is also referred to as total income or adjusted gross income. DTI is the ratio of total monthly debt payments (including mortgage, auto, and any other debts) to total monthly income.