How to Lower My Debt-to-Income Ratio

If you’ve recently applied for a mortgage, you may know that one of the essential qualifying requirements is your debt-to-income ratio (DTI). In this article, we’ll explain what this number means and how to lower your debt-to-income ratio. 

What is a DTI? 

DTI describes the percentage of a borrower’s monthly income that goes toward paying debt. The debt that your mortgage banker considers is what shows up on your credit report, such as student loans, credit cards, car payments, and the proposed mortgage payment. 

An Example of a DTI Calculation

Your mortgage banker will be looking for the minimum amount of monthly debt that you owe. Let’s say that you pay the full statement balance on your credit card every month. However, your credit card company only requires you to make a minimum payment of $40. Your mortgage banker will only consider that $40. When it comes to deferred loans, speak with a mortgage banker to evaluate your unique situation. 

Here’s a quick calculation to demonstrate DTI: 

• Debts – $150 student loan payment + $350 car payment + $2,500 mortgage payment

• Income – $8,000 (before taxes) 
• DTI – ($150+$350+$2,500) / $8,000 = 0.375 = 37.5%

It’s important to note that the DTI does not include things like utilities or your streaming services. That said, borrowers often need a little guidance from a mortgage professional on how to lower their debt-to-income ratio, because activities like cutting down on spending won’t affect the DTI. 

Overcoming DTI challenges is not a budgeting matter; it’s a planning matter. The good news is that wherever there’s an opportunity to plan, there’s the possibility of achieving homeownership sooner. 

How to Lower Your DTI 

There are two sides to overcoming a high DTI: debt and interest rate. 

• Debt – Sitting down with a knowledgeable mortgage banker is invaluable to the process. Borrowers will commonly react to a high DTI by trying to pay down every debt, when in fact, that is rarely an efficient route. And the only way to find the most efficient route? Personalized advice. 
• Interest Rate – The higher your interest rate, the higher your mortgage payment, therefore, the higher your DTI. For some borrowers, debt is not preventing them from qualifying, just the price range for their perfect home. That’s when your mortgage banker will turn to an interest rate solution. 

In short, the right mortgage banker makes all the difference. If you’re trying to lower your debt-to-income ratio, we’d be happy to help you make a plan!