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!
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.
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:
$900 + $500 + $400 + $300 = $2,100
$2,100 / $5,330 = .393
Kelly has a 39.3% debt-to-income ratio.
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.
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.
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.
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:
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:
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 or have a minimum credit score 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!
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.
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