Medical, dental and veterinary professionals endure years of education and training to be well equipped to serve their patients. Despite the years of learning, doctors often graduate with little financial knowledge. 

This lack of knowledge can be detrimental to doctors’ long-term financial health. One financial concept that doctors will encounter often as they search for loan products is debt-to-income (DTI) ratio. If you are not sure what DTI means or how to improve your DTI, we are sharing the basics of this financial metric!

What does debt-to-income ratio mean?

DTI ratio is a financial metric used by lenders and other financial institutions to compare a borrower’s debt to their income. This value can be indicative of an individual’s financial health.

Example of debt-to-income ratio

Kelly is a medical resident, who is interested in getting a loan to help with car repairs. She is trying to figure out her debt-to-income ratio. Take a look at Kelly’s monthly bills and income:

• Mortgage: $900
• Credit cards: $500
• Student loans: $400
• Car loan: $300
• Gross income: $5,330

Kelly’s debt is:

$900 + $500 + $400 + $300 = $2,100

Kelly’s debt-to-income ratio is: 

$2,100 / $5,330 = .393

Kelly has a 39.3% debt-to-income ratio.

How does debt-to-income ratio affect me?

DTI ratios are used by lenders when making credit decisions. Various financial institutions will use it for different loan products, but it is almost always used when obtaining a mortgage. 

What is a good debt-to-income ratio?

Lenders have different DTI ratio cut-offs depending on the product. For instance, a favorable DTI ratio is often considered 43% or lower. A debt-to-income ratio of over 50% may indicate that an individual may have a hard time paying their monthly payments on any debt. The lower a DTI ratio, the more attractive a borrower will look to a lender.

Because of significant student debt, residents and trainees can have debt-to-income ratios in the triple digits. Because school and training is so expensive, this is typically unavoidable, but most lenders only consider the value of the metric without considering the reason for the high debt level. This is one of the many frustrations our doctor co-founders faced when trying to navigate their finances.

What is the problem with debt-to-income ratio?

DTI ratios can be extremely limiting, especially when considering the unique financial lifecycles of doctors. DTIs don’t take into account the type of debt or the cost of servicing the debt. 

For instance, student loans are viewed the same as credit card debt, despite student loans being acquired as an investment in your career and lifetime earning potential and credit card debt carrying higher interest rates. One note on student loans is, if you are on an Income Driven Repayment plan for federal loans this could lower your monthly “debt” payment and therefore decrease your DTI. 

How to prevent a high debt-to-income ratio?

The best way to deal with a high DTI ratio is to prevent it in the first place. Student loan debt is unavoidable for many doctors, but there are ways to reduce the burden. Here are some suggestions you may want to consider:

• Consider the cost of your schooling. We know this can be difficult to avoid. But if you are fortunate enough to get accepted into multiple medical, dental, or veterinary schools, take their costs and cost of living into consideration. If you are looking at dental residencies, try to find one that either pays a stipend or has less expensive costs.
• Minimize your expenses. As a student and resident, we recommend living frugally to prevent piling additional debt on top of your student loans or borrowing more than you need.
• Avoid lifestyle creep as a practicing doctor.  After residency, it can be easy to overspend due to a drastic income increase. Buying new cars or indulging in expensive purchases can be detrimental to your long-term financial health.

How do I improve my debt-to-income ratio?

If you have already dug yourself into a deep hole, don’t worry. You may face difficulty if searching for loans, but you can overcome and improve your financial metrics! The main ways to improve a DTI ratio is by raising income and lowering debt. 

For some doctors and doctors-in-training, raising income may not be a viable long-term option because of the time commitment needed from their profession. Some practicing doctors may benefit from a second job or side hustle. 

According to Medscape, 37% of physicians have a side gig. Common examples of these secondary jobs include medical consulting, chart review, real estate and investing.

If taking on a greater workload is not a possibility, your best course of action is to lower your debt. Ways to lower your debt include:

• Reverse some of your larger purchases. If you purchased a new car or home before considering the financial implications, you may want to consider downsizing. 
• Refinance your student loans. Unless you are considering Public Service Loan Forgiveness or need IDR repayment options on Federal Loans, refinancing your student loans may save you on interest.
• Avoid taking on more debt. If your goal is to pay down your debt load, the last thing you want to do is take on more. Live as frugally as you can to avoid an even greater burden.
• Monitor your progress. As you lower your debt burden, keep an eye on your improved debt load and DTI. Watching these numbers fall can provide motivation to continue your journey to financial freedom.

How can I get a loan if my debt-to-income ratio is not ideal?

Even with aggressive efforts to improve DTI ratio, it may take some doctors years to make meaningful changes to their financial metrics. 

If your DTI ratio is holding you back from financial products that you need, there are options that could work for you. Panacea Financial knows the complexities of doctors’ financial lifecycles because our founders have been there themselves, as practicing doctors. That’s why we don’t use DTI to approve doctors for a PRN Personal Loan. 

If you are needing extra cash for residency relocation, car repairs or any other need, our PRN Personal Loan can offer you the help you need, even when other lenders see you as a risk. Visit our PRN Personal Loan page to learn more and apply!

Before you go…

Financial knowledge is your greatest tool to set yourself up for financial success. If you are interested in learning more about financial topics, visit our Resources page or check out one of our curated topics below. 

• How Can Doctors Avoid Lifestyle Creep?
• Finding a Practice Lender & Bank: Choosing Wisely Today for Your Practice Tomorrow
• A Doctor’s Guide to Refinancing Student Loans
• Why Monthly Budgeting is Critical for Physicians in Training