How To Get a Loan With a High Debt To Income Ratio

Most mortgage lenders will want to ensure you can afford to repay the loan they are lending you.  

Doing so entails analyzing how much you spend servicing debts relative to your income. It is formally known as the debt-to-income ratio or DTI.

Having a high DTI reduces your chances of qualifying for a mortgage loan. On the other hand, a  low DTI indicates an ability to pay off debt well, thus increasing your chances of qualifying for a loan.

If you’ve been thinking of how to get a loan with a high debt-to-income ratio, some strategies can help lower it and achieve your goal.

1. Restructure Your Debts

Reducing your ratios by restructuring or refinancing the debt can increase your chance of qualifying for a mortgage loan.

If it’s a student loan, you can extend the repayment period over a longer-term. For credit card debts, consider paying them off with a personal loan at lower interest rates.

When you transfer your credit card debt to a new account with a zero percent introductory rate for 18 months, that can substantially lower the amount you repay. It can also help you get a loan and clear debts effectively.

The new account may fail to appear on your credit report for 1-2 months, so keep all your paperwork well once you restructure your loan.

Most lenders will not give you the advantage of lower payments until they see new loan terms.

2. Pay Off Your Debts

Paying off all your debts is an effective and fast way to help you lower your DTI ratio and qualify for a loan.

See, if you reduce the debts you owe, you will, in turn, reduce your monthly payments, thus reducing the percentage of monthly income servicing the loan.

In time, paying off debt also reduces your credit utilization ratio – your debt divided by your credit limit.

A low credit utilization ratio also improves the credit score, which improves the chances of getting approved for a loan with favorable terms.

3. Go For a Less Demanding Program

Different mortgage programs come with different DTI limits. It is likely that with a high DTI, you are looking for a less demanding loan program.

For instance, Fannie Mae set a maximum DTI of 36% for borrowers with lower credit scores and down payments. Borrowers with higher credit and down payments often have a limit of 45%.

FHA loans are a good choice for borrowers with a high DTI. In some situations, they can allow a DTI of as high as 50%, and low credit scores can be overlooked.

Prospective homebuyers living in rural areas can go for USDA loans, where income may be notably lower than in urban areas. They have similar benefits to FHA loans.

Maybe the most forgiving mortgage program of all is the VA loan. It is given only to current and former military service members.

The DTI for VA loans is quite high but provided you show a required minimum level of residual income, and you are good to go. VA loans are the perfect option for borrowers with a high DTI.

4. Get a Lower Mortgage Rate

If a high mortgage rate doesn’t work for you, get a lower one as it also helps reduce your DTI.

You will have to ‘’buy down’’ the rate-pay points to get a lower monthly payment and interest rate.

As you shop, be careful. You will want a loan with a lower start rate. Opt for, let’s say, a 5-year adjustable-rate mortgage plan rather than a 30-year fixed loan.

Homebuyers should not shun from asking the seller to chip in toward closing costs. Sellers can buy rates down instead of reducing the loan amount as long as it lowers your payment.

Look, sometimes the numbers you have may work against you to the point you feel like giving up. Feel free to consult an expert mortgage lender who will assist you in solving your debt issues.

5. Reduce Non-Essential Spending

 How To Get a Loan With High Debt-To-Income Ratio

What better way to reduce your DTI than to cut back on unnecessary expenditure? Look at where you spend your money each month and try as much as possible to go slow.

Splurging on non-essential stuff will increase your DTI, therefore reducing your chances of qualifying for a loan.

6. Do A Cash-Out Refinance

If you want to refinance but your high DTI is holding you back, you can take a cash-out to refinance to lower it.

Here, you take a loan large enough to refinance your already existing mortgage. The extra money can be used to service other debts, thereby lowering your DTI.

Cash-out refinance offers low-interest rates and favorable terms, but you risk losing your home if you fail to pay off your new mortgage.

What Percent of Debt-To-Income Is Acceptable To Get a Loan?

Your DTI measures your debt amount in comparison to your total monthly income.

High DTI indicates too much debt, which lenders dislike, while lower DTI indicates a good balance between debt and income, which lenders favor.

Well, specifically, most lenders want to see a DTI of 36% or lower to consider approving that loan, with no more than 28% of it going toward repaying the loan.

Is There a Maximum DTI Required To Qualify For a Loan?

In most cases, the maximum debt-to-income ratio to buy a house is 43 percent. This percentage makes it easier for borrowers to make monthly payments.

Nevertheless, always strive to lower your DTI and overall credit score since it makes the whole home buying process smoother and less stressful.

Final Word On How To Get a Loan With High Debt-To-Income Ratio

Most mortgage lenders like borrowers whose reports prove that they can manage to pay off a loan. Your DTI can decide whether you qualify for that dream home or not.

If you have a high DTI ratio, lenders view you as a risky borrower, and most of them tend to ignore such loans.

Keeping your DTI low also paves the way for favorable loan terms such as lower interest rates and monthly payments.

So, if you’re stressed out because of your high DTI, follow the strategies mentioned above to improve it and better your chances of qualifying for a loan.

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