How to Lower Your Debt-to-Income Ratio?

While you don’t need to be debt-free to qualify for a mortgage, lenders use your debt-to-income ratio (DTI) to determine a comfortable mortgage payment based on your earnings and minimum debts. A lower DTI signals to a lender that a greater percentage of your income can go toward your monthly mortgage payment.

From reducing your existing debts, to increasing your income, here are six strategies for lowering your DTI ahead of applying for a mortgage.

1. Reduce your monthly minimums

Your DTI is based on minimum monthly payments on your credit cards and other debts. The balance on these debts, including credit cards, student loans and auto loans, doesn’t impact your DTI. What matters is how much you pay towards those debts each month. Paying down your debts may help you qualify for lower minimums. If you’re able, paying off your debts can reduce the number of debt payments you make each month, and will also help lower your DTI.

2. Increase your income

Increasing your monthly income can help lower your DTI. Even if a second job may not count towards qualifying income on a mortgage, it can be used to pay down debts (lowering monthly payments) and help you save up for a down payment and closing costs on a new home. Consider getting a part-time job, starting a side hustle, or asking for a raise at your current job. Keep in mind that if you take on a second job or side hustle, it can take up to two years of consistent income for some lenders to consider it part of your employment history.

3. Consolidate your debt

Debt consolidation is the process of combining multiple debts to make a single monthly payment toward one balance with one interest rate. It is usually done by taking out a personal loan to pay off several smaller loans, which means you’ll have to meet the lender’s financial criteria. However, the monthly payment for most debt consolidation plans is typically lower than the total amount of your previous payments to various creditors, which can lower your DTI.

4. Negotiate your interest with creditors

Some private lenders, typically those offering private student loans or credit cards, may be willing to negotiate your interest rate. To do so, the lender typically requires a history of making on-time payments and having a good credit score (usually 700 or higher). A lower interest rate can decrease your monthly payment amount, allowing you to make higher payments toward your principal balance, so you can pay your debt off faster.

5. Avoid taking on new debts

Whether you have room on your credit cards or have enough income left over to cover a short-term private loan, you want to avoid racking up more debt. Using up your remaining credit or taking out new loans will affect your credit score, increasing your DTI, which is the opposite of what you want to do when applying for a mortgage.

6. Consider a co-signer or co-borrower

When you use a co-signer or co-borrower, the lender will consider everyone’s financial factors. They’ll typically combine your individual DTI ratios, potentially lowering the percentage and bolstering your mortgage application. A lower DTI can also help you obtain better mortgage rates.

*An equal housing lender. NMLS #10287

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