Trump tweeted on Sunday that Coats would step down on August 15 and that he would nominate Ratcliffe, who aggressively defended the President and questioned former special counsel Robert Mueller last week during Congressional hearings involving his report on Russian interference, to replace Coats.
"I would like to thank Dan for his great service to our Country," Trump tweeted. "The Acting Director will be named shortly."
Ratcliffe, 53, is a former US attorney for the eastern district of Texas who was elected to the House in 2014 from a Northeast Texas district. He is a prominent supporter of Trump and his policies, media reports said.
He currently serves on both the House intelligence and judiciary committees and has worked to highlight threats to critical infrastructure while in Congress.
Trump's suspicions of the country's intelligence agencies have grown since they concluded that Russia interfered in the 2016 election with the goal of getting him elected, reports say.
In a letter of resignation released on Sunday night, Coats said working as the US top intelligence official had been a "distinct privilege", but that it was time for him to "move on" to the next chapter of his life.
He noted his work to strengthen the intelligence community's effort to prevent harm to the US from adversaries and reform security clearance processes.
Coats said he felt "marginalized" by the President on issues of national security, reports said.
The job of the DNI is to oversee the entire US intelligence community - a collection of agencies that includes the FBI, the CIA, and the NSA as well as offices within the Pentagon, State Department, and even the Department of Energy.
The DNI is also meant to serve as "the principal adviser" to the President on all "intelligence matters related to national security".
Coats has been the DNI since March 2017. He frequently disagreed with Trump on a number of highly publicized intelligence matters, including US policy towards Russia, North Korea's nuclear weapons programme, and whether Iran violated the 2015 nuclear deal that Trump later abandoned.
In July 2018, in his most public rift with Coats and the intelligence community, Trump stood beside Russian President Vladimir Putin and publicly said he doubted US spies' assessment that Russia had tried to interfere in the election, declaring that Putin had vigorously denied it.
Criticizing Ratcliffe's appointment, Senate Democratic leader Chuck Schumer said "it's clear that Rep Ratcliffe was selected because he exhibited blind loyalty to President Trump with his demagogic questioning of ... Mueller".
( With inputs from IANS )