How to Lower Debt to Income (DTI) Ratio for Mortgage | CrossCountry Mortgage (2024)

When you apply for a mortgage, your lender will examine your overall financial health. They will obtain a credit report, ask for proof of income, and calculate your debt-to-income (DTI) ratio. Qualifying for a mortgage loan requires a healthy DTI ratio. To increase your chances of getting approved for a loan, follow these practical tips to lower your debt-to-income (DTI) ratio and improve your financial health. Learn about what debt-to-income ratio is, how to calculate it, and effective strategies to reduce it.

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What Is Debt-to-Income Ratio?

Your debt-to-income ratio is the amount of monthly recurring debt payments compared to your gross monthly income. For instance, let’s say that your gross monthly income is $5,000. You have a total of $2,000 of recurring debt obligations, which include a car loan, rent, and a credit card balance. To calculate your DTI ratio, you can divide your minimum payment and debts ($2,000) by your gross monthly income ($5,000). In this scenario, the result would be 0.40, or 40%. Generally speaking, you want your DTI to be 50% or less because this provides enough financial leeway to cover other expenses.

Not all of your monthly expenses are used to calculate DTI. When assessing your debt-to-income ratio, lenders will only examine certain bills and obligations. These include rent or mortgage payments, car loans, student loans, credit card debts, or other monthly debt payments. They also include recurring obligations like child support and alimony. Your DTI does not include miscellaneous expenses like utility bills, home repairs, groceries, daycare, commuting expenses, health care/insurance, or car insurance.

How to Lower Debt to Income (DTI) Ratio for Mortgage | CrossCountry Mortgage (1)

DTI can be divided into two subtypes: front-end and back-end debt-to-income ratio.

Understanding Front-End and Back-End DTI

1. Front-End Debt-to-Income Ratio (Housing Expenses):

Front-end DTI is the ratio between your gross income and your current or projected housing expenses. This figure will include your base mortgage payment, property taxes, mortgage insurance, homeowners’ insurance, and homeowners’ association dues when applicable. When evaluating your creditworthiness, lenders will assess your total DTI and your front-end DTI. Generally, lenders want your front-end DTI to be under 35%. However, some loan programsand lenders have slightly different thresholds.

2. Back-End Debt-to-Income Ratio (Debts):

Back-end DTI is generally larger than front-end DTI and represents the total recurring debts that you owe compared to your gross monthly income. The back-end DTI includes the front-end expenses (mortgage payment, property taxes, mortgage insurance, homeowners’ insurance, and homeowners’ association dues) and the recurring obligations we spoke of previously (car loans, student loans, credit card debt, child support, and alimony). Breaking down DTI into front-end and back-end can help you better understand which financial obligations are making the biggest impact on your creditworthiness.

Practical Tips and Tricks to Lower Your Debt-to-Income Ratio

If you’ll be applying for a mortgage soon and want to know how to lower debt-to-income ratio, remember these tips and tricks:

1. Pay Down Debt

Paying down debt is the most straightforward way to reduce your DTI. The fewer debts you owe, the lower your debt-to-income ratio will be. Suppose that you have a car loan with a monthly payment of $500. You can begin paying an extra $250 toward the principal each month to pay off the vehicle sooner. This extra cash will reduce your overall debt faster and save you money in interest.However, your DTI will not drop until your car loan is paid in full. DTI does not take into account the total amount of debt you owe; instead, it analyzes your monthly expenses in relation to your gross monthly income.

2. Consolidate Debt

Debt consolidation is the process of combining multiple monthly bills into a single payment. You can consolidate debt by obtaining a personal loan and using those funds to pay off multiple loan payments, such as smaller loans and credit cards. The monthly payment of your debt consolidation loan will be lower than the cumulative amount of all of your old payments. Therefore, it will drop your DTI.

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3. Lower Your Interest on Debt

You can lower DTI by decreasing your monthly payment amounts, even if you do not reduce your total amount owed. The easiest way to reduce your monthly payments is to refinance existing loans to lower your interest rate. Dropping the interest rate by just one or two percentage points can make a huge difference in your monthly payment, especially if the overall loan value is high. When using this method, consider refinancing car loans and consolidating credit cards into a single personal loan.

4. Increase Your Income

If you want to boost your gross monthly income, consider getting a side hustle. You could deliver food, offer ride-sharing services, or make and sell crafts online.You will need to generate a consistent amount of income using your side hustle for 2 years before lenders recognize this additional revenue stream. Therefore, you should work on increasing your income soon so that you will be able to obtain the loan you need when you are ready to buy a home.

Perhaps you are scheduled for a raise or promotion that will generate additional income. Or it may be time to consider a higher paying position or company.

How to Calculate Your Debt-to-Income Ratio for a Mortgage

1.Gather Monthly Expenses:

Start by listing your relevant monthly expenses, such as rent, credit card bills, and car loans. Remember, do not include the cost of groceries, gas, utilities, childcare, commute, or health care/insurance.

2.Determine Your Gross Monthly Income:

Calculate your gross monthly income by dividing your annual gross income by 12 or by reviewing four weeks of your most recent pay stubs.

3.Calculate DTI:

Divide your monthly debt payments by your gross monthly income. This calculation should yield a number between zero and one — for example, 0.40. This number is your DTI. It can be expressed as a percentage if you multiply it by 100. In this example, your DTI would be 40%.

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

While most lenders want your DTI to be less than 50%, there are instances where you may qualify for a loan with a high debt-to-income ratio. For example, if you are self-employed, your W2s might not accurately reflect your true income. As a result, your DTI will appear unusually high even if you are in good financial health. Fortunately, you may still be able to qualify for a type of home loan by working with CrossCountry Mortgage. We offer several nontraditional mortgage options for individuals who might not be eligible for traditional mortgages.

If you would like to learn more about our flexible lending options and how we might be able to help you become a homeowner, connect with CrossCountry Mortgage's expert lending team today.

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How to Lower Debt to Income (DTI) Ratio for Mortgage | CrossCountry Mortgage (2024)


How to lower debt-to-income ratio for a mortgage? ›

Practical Tips and Tricks to Lower Your Debt-to-Income Ratio
  1. Pay Down Debt. Paying down debt is the most straightforward way to reduce your DTI. ...
  2. Consolidate Debt. Debt consolidation is the process of combining multiple monthly bills into a single payment. ...
  3. Lower Your Interest on Debt. ...
  4. Increase Your Income.
Jan 4, 2023

Can you get a mortgage with 55% DTI? ›

For FHA and VA loans, the DTI ratio limits are generally higher than those for conventional mortgages. For example, lenders may allow a DTI ratio of up to 55% for an FHA and VA mortgage. However, this can vary depending on the lender and other factors.

What is the acceptable DTI ratio for a mortgage? ›

Your particular ratio in addition to your overall monthly income and debt, and credit rating are weighed when you apply for a new credit account. Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.

How to get a loan when your debt-to-income ratio is too high? ›

Below are some types of high debt-to-income ratio loans that could be accessible to you.
  1. Personal loans. ...
  2. Payday loans. ...
  3. Secured loans. ...
  4. Improve your credit score. ...
  5. Apply with a co-signer. ...
  6. Focus on increasing your income. ...
  7. Focus on paying down debt. ...
  8. Look into refinancing or debt consolidation.
Jul 20, 2023

Can you buy a house with bad debt-to-income ratio? ›

Lenders look at DTI when deciding whether or not to extend credit to a potential borrower and at what rates. A good DTI is considered to be below 36%, and anything above 43% may preclude you from getting a loan.

Are utilities included in the debt-to-income ratio? ›

Monthly Payments Not Included in the Debt-to-Income Formula

Many of your monthly bills aren't included in your debt-to-income ratio because they're not debts. These typically include common household expenses such as: Utilities (garbage, electricity, cell phone/landline, gas, water) Cable and internet.

What is the FHA DTI limit? ›

The max debt-to-income ratio for an FHA loan is 43%. In other words, your total monthly debts (including future monthly mortgage payments) shouldn't exceed 43% of your pre-tax monthly income if you want to qualify for an FHA loan.

Which type of mortgage accepts the highest DTI ratio? ›

FHA loans have more lenient qualification requirements than other loans. Borrowers must have a minimum credit score of 580 to qualify for the loan. The maximum DTI for FHA loans is 57%.

What is the DTI limit for FHA in 2024? ›

The FHA-recommended limit is a DTI ratio of 43%. However, even if you have a higher DTI ratio, lenders can still consider you if you have considerable cash reserves and a high income.

What is considered a bad DTI ratio? ›

Key takeaways. Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

Does rent count in debt-to-income ratio? ›

Your debt-to-income ratio (DTI) compares how much you owe each month to how much you earn. Specifically, it's the percentage of your gross monthly income (before taxes) that goes towards payments for rent, mortgage, credit cards, or other debt.

Is debt-to-income gross or net? ›

Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow. Different loan products and lenders will have different DTI limits.

How to lower debt-to-income ratio quickly? ›

To do so, you could:
  1. Increase the amount you pay monthly toward your debts. Extra payments can help lower your overall debt more quickly.
  2. Ask creditors to reduce your interest rate, which would lead to savings that you could use to pay down debt.
  3. Avoid taking on more debt.
  4. Look for ways to increase your income.

How can I keep my debt-to-income ratio as low as possible? ›

A general rule of thumb is to keep your overall debt-to-income ratio at or below 43%. This is seen as a wise target because it's the maximum debt-to-income ratio at which you're eligible for a Qualified Mortgage —a type of home loan designed to be stable and borrower-friendly.

How can I consolidate my debt with a high debt-to-income ratio? ›

If you are struggling to get a debt consolidation loan because of high debt-to-income ratio, consider another form of consolidation that doesn't require a loan — a debt management plan. InCharge Debt Solutions consolidates your credit card debt using a debt management plan – not a loan — to pay off the debt.

Can I refinance my home with a high debt-to-income ratio? ›

Having a high DTI ratio can make refinancing a mortgage difficult, but it's possible. Aim for a maximum DTI ratio of 36% to get the best deals. You may be able to refinance with a DTI ratio of 50% or higher. You can reduce your DTI ratio by boosting your income or by reducing debts.

What is the ideal mortgage to income ratio? ›

The 28% rule

To determine how much you can afford using this rule, multiply your monthly gross income by 28%. For example, if you make $10,000 every month, multiply $10,000 by 0.28 to get $2,800. Using these figures, your monthly mortgage payment should be no more than $2,800.

What is a good debt-to-income ratio? ›

It's calculated by dividing your monthly debts by your gross monthly income. Generally, it's a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

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