Worried about high debt-to-income ratio?
Here is how you can still avail…..
A high debt-to-income ratio can result in a bad luck for your mortgage application.
However, you can find ways to get a loan approval even with high debt levels.
- Look for a loan program with relaxed DTI
Once you start loan shopping you will find different loan programs come with varying DTI limits. For example, Fannie Mae sets its maximum DTI at 36% for those with smaller down payments and lower credit scores. Often, the limit for those with higher down payments or credit scores is 45%.
FHA loans has more relaxed DTI ratio and allows up to 50% in some cases, and your credit does not have to be top-notch.
Likewise, USDA loans are designed to promote homeownership in rural areas — places where income might be lower than in highly populated employment centers.
Perhaps the most lenient of all are VA loans, which are zero-down financing reserved for current and former military service members. If there is a lot of residual income, the DTI for these loans can be quite high. If you’re fortunate enough to be eligible, a VA loan is likely the best option for high-debt borrowers.
- Restructure your debts
If the above option isn’t working in favor of you or in case you want to avail a lower ratio option, you can plan to reduce your ratios by refinancing or restructuring your debt.
You might decide to pay off credit cards with a personal loan at a lower interest rate and payment. Even transferring your credit card balances to a new one with a 0% introductory rate can lower your payment for up to 18 months. That helps you qualify for your mortgage and pay off your debts faster as well.
Refinancing your car loan to a longer term, a lower rate, or both can be a good move. Even you can work on your student loan repayment by extending over a longer period of time.
If you recently restructured a loan, keep all the paperwork handy. The new account may not show up on your credit report for 30 to 60 days. Your lender will need to see new loan terms to give you the benefit of lower payments.
- Tackle your smallest debts first
A big savior to reduce your DTI is by focusing on your smaller debts. Paying off these debts entirely, if feasible, can lead to an immediate decrease in your DTI. Alternatively, consistently paying more than the minimum required amount on these debts can gradually reduce your DTI. This approach is especially beneficial for those exploring high DTI loans or mortgages from lenders who are considerate of high debt-to-income ratios.
- Pay down the right accounts
If there is a possibility for you to pay few instalments of any loan which is currently running so that there are fewer than 10 payments left to be repaid, mortgage lenders usually drop that payment from your ratios.
Or you can pay lumpsum and reduce your credit card balances to lower your monthly minimum. Or, you can choose to avail for monthly payments of all your credit card balances and pay off the ones which has high payment to balance ratio.
- Cash-out refinancing
If you’re trying to refinance but your debts are too high, you might be able to eliminate them with a cash-out refinance.
The extra cash you take from the mortgage is earmarked to pay off debts, thereby reducing your debt-to-income ratio.
When you close on a debt consolidation refinance, cheques are issued directly to your creditors. You may be required to close those accounts as well.
- Get a lower mortgage rate
The other way to reduce your debt-to-income ratio is to drop the payment on your new mortgage. You can do this by “buying down” the rate — to get a lower interest rate and payment.
Buyers should consider asking the seller to contribute toward closing costs. The seller can buy your rate down instead of reducing the home price if it gives you a lower payment.
- Consider adding a co-borrower
Involving a spouse or partner as your co-borrower in your loan application can be advantageous. If your partner has a lower DTI, their financial profile can help reduce the overall DTI for the household. This strategy is particularly useful for couples seeking high debt-to-income ratio mortgage solutions. However, if your partner’s DTI is similar to or higher than yours, their inclusion might not be beneficial.
- Opt for a co-signer
Involving a co-signer like a family member or a close friend, can be a viable option since their financial stability and debt-to-income ratio are considered by lenders, which can enhance your loan application. It’s important to note that a co-signer doesn’t need to reside on the property but must agree to fulfill the loan obligations if you are unable to do so. This addition could potentially lead to qualifying for a larger mortgage or obtaining more favorable terms, such as lower interest rates.
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