DTI is one of the most common reasons for not being able to get pre-approved for a loan.
Your debt-to-income ratio is simply the amount of your debt payments compared to the income you make. This is important because it is indicative of the amount of wiggle room you have to make your monthly payments on your mortgage.
Here are a few simple ways to lower your DTI quickly!
Pay off debt to lower your DTI
It stands to good reason that paying off debt is one of the fastest ways you can lower your DTI. You should focus on small debts that you can pay off quickly, or debts that have payments based on the amount of debt you have utilized.
For example, if you have a $30,000 auto loan, and $1,000 on a credit card, you should pay down the credit card before working on the auto loan.
On the other hand, if you have a personal loan that has $5,000 on it, and a credit card with $10,000 on it, you may want to pay the credit card down first. The reason for this is that every credit card payment lowers your minimum monthly payment, whereas the personal loan payment is fixed.
Ultimately, paying down debt will lower your DTI, but if all of your debt is large debt that you can’t pay off right away it might make sense to focus on improving your income instead, and steadily chip into any debt you have.
Lower Interest rates through a balance transfer
Another way to lower your DTI is to take advantage of a 0% interest balance offer for transferring funds to a new account/card.
This works if the 0% interest lowers your minimum monthly payments compared to what you were paying prior to the transfer.
Be wary of the balance transfer fees though, and ensure it actually makes financial sense for you to do this.
Refinance your debt for a lower monthly payment
If you can refinance an existing loan to lower your monthly payment it can definitely help your DTI.
Use your spouse's income or partner up to help qualify
If you and your spouse are buying the home together, or you are partnering with somebody, make sure you use their income to qualify for the loan too – but, of course, we urge collaboration and communication. Make sure your partner is happy to do so.
Negotiate a higher salary
If you can negotiate a pay raise it will absolutely increase your DTI, and we appreciate this can be hard to do. But, if you don’t ask, you don’t get.
Earning extra money through side hustles is another great option, and there are so many avenues to explore. You can drive for Uber, deliver food, freelance, or work any of a myriad of side hustles to earn more money. Again, the point here is that the more money you earn, the higher your debt-to-income ratio is.
The downside is you need to have been working these side hustles long enough for them to show up on your tax return as income in order to claim it, but you have to start somewhere!
Let’s say you decide to buy a four-plex in order to house-hack it by renting the three other units out. You will be able to claim 75% of the projected gross monthly rental income toward your debt to income, assuming you have 2-years’ experience as a landlord.
If you do not personally have 2-years’ experience as a landlord, you will need to hire a property manager to manage your tenants. This is a small price to pay for being able to claim future rental income, from the property you’re buying, toward your DTI.
This is just another reason why house hacking is one of my absolute favorite ways to get into real estate. You can literally qualify for a larger mortgage buying a four-plex than you could a single-family home!
The bottom line for lowering your DTI
There are two primary ways to lower your DTI:
- Lower your debt and monthly payments,
- Increase your income.
The faster you can do these things, the more money you’ll be able to borrow.