Having a high debt-to-income ratio can make it hard to be approved for a loan. Discover what options you have.
You can look for a program or lender that accepts high debt-to-income ratios. FHA loans, for example, can allow DTIs up to 50%. You can also improve your DTI by restructuring your loans or strategically paying down your debt.
Learn more about the debt-to-income ratio, including how to calculate and improve it and get a loan if your DTI ratio is too high.
How To Get A Loan With High Debt-To-Income Ratio?
Applying for a mortgage means the lender will take certain steps to make sure you can afford it and will not default on the loan. Part of the process will mean checking your debt against your income. When you have debt that is too high, you will have trouble getting approved for your mortgage. The good news is there are some tips to getting a mortgage even when you have a high DTI ratio.
What Is DTI? – A Quick Overview
Lenders look at your DTI (debt-to-income) when you apply for a mortgage loan. But what exactly is DTI? This is the ratio that compares the money you spend to the money you earn. The debt comes in the form of loans. This gives the lender an idea of the payment amount you can comfortably afford.
This figure is determined by comparing your monthly minimum debt bills to the gross monthly income you receive.
Let's go into more detail below.
Debt To Income Ratio – What Is It?
The concept is simple: divide your monthly debt by income and see what the percentage is. There are two different types: the front end and the back end. Auto lenders tend to view your back-end DTI, but here is some information on both:
Front-end DTI is your housing costs, such as rent and mortgage or HOA fees, taxes, and insurance. It doesn't take into account credit cards, personal loans, and other loans.
Back-end DTI is all your monthly debt bills. When calculating your DTI, use your gross monthly income rather than net income. Gross income is before deductions and taxes such as social security.
What Is A Good DTI?
A good DTI is considered to be 35% or lower. You are unlikely to have issues getting a loan due to your debt-to-income ratio if it is in this range.
If your DTI is 36% to 49%, your debt may still be manageable. However, it will be harder to find a loan.
If your DTI is higher than 50%, getting a loan may be impossible (or nearly impossible). You will likely need to improve your ratio before applying for a loan.
How to Calculate Your DTI
Because auto lenders use back-end DTI, that will be the focus of this discussion. To calculate back-end DTI, do the following:
Add all monthly debt payments. Look at your monthly statements to determine the exact amount. Then compare with your monthly income. Divide your salary by 12 to get your gross monthly income.
Debt to Income Calculator Example
As mentioned, your debt-to-income ratio is the sum of your debt payments monthly divided by the sum of your income monthly. The following shows an example of how to calculate it.
- Student loans – $400.00
- Credit Card installments – $200.00
- House Payment – $500
- Total = $1,100.00
- Salary – $3,000
- Part-time work – $1,500
- Total = $4,500
For the above, you will take $1,100 and divide it by $4,500.
This gives you .24, or a DTI of 24%. If you have a difficult time with this equation, then consider using a debt-to-income calculator.
DTI Calculator – How to Use One
You can easily find DTI calculators with a simple online search. Most will have you enter your total debt and total income per month. Some, however, will make it even easier and give you categories for income and debt to fill out. For example, your debt section may include specific items like auto loans or school loans.
How To Get A Car Loan With High Debt To Income Ratio
RateGenius has shown that nearly 90% of those applying for an auto loan had less than 50% DTI. You should remember that auto loan lenders have different ideas of what you need for a DTI. Generally, 43% is the maximum lenders consider. Do not expect to find a financer for your auto loan if your DTI is higher than 45 to 50%, including the auto loan.
How To Get A Home Loan With A High Debt To Income Ratio
If you have a high debt-to-income ratio, the best way to get a home loan will be to do what you can to improve your DTI ratio first. However, this can take time. If you can't lower your DTI ratio fast or don't have time to wait, there are a few good solutions to try.
Look for Programs That Accept High DTIs
While most mortgage lenders want you to have a low DTI, what qualifies as "low" will vary. Even within some programs, you may have more leeway in your DTI if you make a larger down payment.
For example, if your credit score isn't great and you have a smaller down payment, Fannie Mae will typically require a DTI of less than 36%. But if you have a better credit score or down payment, you can likely have a DTI of up to 45%.
FHA loans are also a good option, as they sometimes lend to people with DTIs of up to 50%. They also don't usually come with strict credit requirements.
If you are a former or current military member, consider a VA loan. These are known for accepting higher DTIs, especially if you have a lot of residual income.
Use a Quick Fix to Reduce Your DTI
Or you can use one of the "quick" fixes that can help you lower your debt-to-income ratio quickly.
Buy Down Your Mortgage Rate
You can reduce your ratio by dropping your new mortgage payment. This involves using points to reduce your payment and interest rate. It is called "buying down" the rate.
Just be sure to do your research before choosing one of these mortgages that take advantage of points.
Ways of Improving Your DTI
Whether you want an auto loan, mortgage, or another type of loan, your best choice is to lower your DTI before applying. But this is easier said than done.
If you are looking for a better DTI, you will need to focus on the following:
- Increase your gross income
- Decrease your monthly debts
For faster results, work on both at once.
Remember that most methods of achieving these goals will require time, so they won't deliver quick results. Some, however, can give you more immediate results.
Quick Fix – Restructure Debt
One of the faster options for improving your debt-to-income ratio is restructuring or refinancing your debt. Just remember to keep all of the relevant paperwork on hand, as the updates may not show up on your credit report for 60 days. You can show your new lender the paperwork before your report updates.
The following are just some examples of how to restructure your debt to improve your DTI:
- Extend the term on your loan for lower monthly payments
- Refinance your loan to take advantage of a lower interest rate
- Use a personal loan with a lower interest rate to pay off your credit card debt
- Move your credit card balances to a new card that offers a 0% introductory rate
Semi-Quick Fix – Be Strategic About Which Debts You Pay Down
While paying down any debt will take time and eventually improve your DTI, you can speed up its effect on your ratio.
Conveniently, mortgage lenders will typically exclude installment loans from your DTI calculation if you have less than 10 payments left.
But you still want to be strategic about which debts you focus on. If your ultimate goal is to improve your DTI, calculate the payment-to-balance ratio for each debt. So, you would divide your credit card balance by the monthly payment on that card. Then, focus on the debts with the highest results.
More like this: What Is Private Debt? How Is It Different From Public Debt?
Consider a Debt Repayment Strategy
There are numerous ways to get your debts under control. One popular method is the snowball. This is when you pick the debt with the lowest balance and pay that consider being creative.
Consider Other Money-Saving Strategies
Maybe it is time for a roommate or to downsize your apartment to get closer to your goal. You can also consider getting a side job to increase your income.
It can also be smart to look at your monthly subscriptions to find areas where you can cut costs.
Even if those subscriptions aren't included in your DTI, reducing them gives you more money to put toward paying off the debt that is included.
If you have a high debt-to-income ratio, you should expect it to be challenging to be approved for a loan. However, some lenders will work with people who have high DTIs, especially if you have a larger down payment or a good credit score. You should also take active steps to reduce your debt-to-income ratio.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.