Next to your credit score, lenders pay the most attention to your debt-to-income ratio or DTI. That’s because this ratio tells lenders if you can afford the mortgage or if you’ll struggle. A high DTI creates a high risk of default and most lenders avoid applicants with them.
If you have a high debt-to-income ratio, what can you do to decrease it fast? Here are a few of our favorite ways.
1. Consolidate revolving debt.
Do you have a lot of credit card debt? Why not consolidate it? If you have good credit, you may be eligible for a 0% APR balance transfer credit card. Not only will you have one monthly payment, but you’ll pay less (or no) interest on your debt. If you pay the debt off before the 0% APR expires, you’ll not only save yourself money in interest, but you’ll also lower your DTI.
Even if you don’t pay it off in full, having only one credit card with a balance and several other cards with open credit lines helps your utilization ration, which benefits your credit score.
2. Start a side gig.
Do you have debt you just don’t know how you’ll pay off? If you feel tapped out, try starting a second gig. It’s a lot easier than you think, especially with the internet. Think about your skills. Do you make crafts? Are you good with graphic design? Are you great at multi-tasking and helping others? There are thousands of gigs you can start or do to bring in extra money.
Take that extra money and pay down your debt. With larger payments toward your debt, you’ll decrease your DTI faster than you thought possible.
3. Get a second job.
If the gig economy isn’t your thing, what about a second job? It doesn’t have to be forever, just long enough to get you out of debt. Take the funds you earn and pay it directly toward your debts. Pay them off in full or as low as possible to get your DTI as low as possible.
4. Adjust your budget.
If you have room in your budget, make larger payments toward your debt. Maybe it never crossed your mind to pay more than the minimum payments or you just got into the habit of it. Pick a few debts and make larger payments toward them. The lower you get the balances, the lower your DTI gets, which may help with loan approval.
If you can’t pay your debts down the ‘traditional way,’ be creative. Find ways to bring more money in or to make paying your debts down easier. If all else fails, you can refinance the debt into a longer term loan, just know that you’ll pay more in interest over the life of the loan.
No matter which way you look at it, there are ways to get your DTI down and get the mortgage approval you need to buy your dream home.
