How to Get a Consolidation Loan with a High DTI

Debt-to-income ratio, or DTI, is one measure lenders use when determining whether to qualify you for a loan. DTI is the percentage of your monthly income that goes toward your debt and housing payments. When you have a high DTI, you may still be able to get a loan, but you may need to get creative with solutions. 

Debt-to-Income Ratio (DTI): The Basics

Understanding exactly what DTI is and why it matters could help you determine what you need to do with your financial situation to increase your chances of getting approved for a loan.

What Is DTI and Why it Matters for Loan Approval

DTI is debt-to-income ratio, or the amount of your income that goes towards debt. It’s an important metric that shows lenders whether you could afford taking on a new loan payment, given your other financial obligations. 

A high DTI could mean you might not have enough money coming in to easily cover your expenses and pay your bills. You’re living a little too close to the edge for their comfort. On the flip side, a low DTI means you could comfortably pay your bills and take on a new loan, if needed. 

How to Calculate Your DTI

To calculate your DTI, add up all your monthly debts plus any bills you’re required to pay. Divide the total by your gross income, or the amount you make before taxes. Include income you make in your full-time or even your side business, if you have one.

Expenses you should include in your DTI calculation include loan payments and other monthly obligations such as:

• Alimony payments you have to make

• Child support payments you have to make

• Rent payment

• Mortgage payment. Add property taxes, homeowners insurance, and homeowners association dues if they aren’t already included in your mortgage payment.

• Auto loans

• Personal loans

• Student loans 

Let’s say you pay $1,200 in rent, $250 a month in auto loan payments, and $550 for your other loans. Your monthly income before taxes is $4,500. In this case, your DTI is 44%. 

Ideal DTI Ratios for Different Loan Types

Lenders tend to have maximum DTI limits they’ll allow when an applicant wants to take out a loan. The maximum amount will depend on the lender and the type of loan you want. 

For most mortgage lenders in the U.S., the maximum DTI ranges from 36% to 50%. The limit depends on what type of loan you’re applying for, your credit score, and how much of a down payment you’re making. 

When it comes to personal loans, lenders for unsecured loans typically allow a maximum DTI between 35% and 40%. Some may push this higher if you have good credit. Credit card issuers don’t necessarily consider your DTI—some do, and many don’t. Auto lenders or secured loans may have higher DTI limits since you need to provide collateral, reducing risk for the lender. 

Challenges of High DTI When Applying for Loans

What lenders consider a high DTI for one customer might not be excessive for another customer. However, if you apply for a loan and the lender believes you have a high DTI, you may face certain challenges like having your loan application denied or being offered higher interest rates. 

Why Lenders Hesitate With High DTI Borrowers

Lenders want to reduce their risk as much as possible or believe that they’ll be able to get back the money they lend out. That’s why lenders look at various financial factors to see whether a borrower has the ability to repay their loan.

A high DTI could mean the applicant may be stretched too thin financially. Think about it: If someone needs to pay back a bunch of loans, a lender may believe that this person may struggle to repay an additional loan. 

DTI isn’t the only factor lenders consider. Your loan application may be approved even with a high DTI if your credit is excellent, your income is stable, and you have some savings. 

Impact of High DTI on Loan Terms and Interest Rates

When you have a high DTI, you may be offered loans with higher interest rates. You may also not have as many choices when it comes to your loan repayment terms. 

Common Rejection Reasons for High DTI Borrowers

Aside from your DTI being considered too high, some reasons your loan application may be rejected include:

• Your credit score was too low

• You don't make enough income

• You wanted to borrow too much money

• The loan purpose didn’t match the loan type

Loan Types for High DTI Borrowers

It’s still possible to take out a loan even if you have a high DTI. 

Personal Loans for High DTI Borrowers

Some lenders specifically work with borrowers with various financial profiles, even ones with high DTIs. You could shop around to see what you may qualify for, and see what other criteria lenders look for that could increase your chances of getting approved. 

Personal loans with five-year or longer terms may help the chances of you being offered a better interest rate. You may be offered better terms with a cosigner or if you pledge some collateral. 

Debt Consolidation Loans: Secured vs. Unsecured

Debt consolidation could be a challenge if you have a high DTI. That’s because lenders want to be sure you’re not using their loan and taking on additional debt, which could make you seem like a risky borrower. 

If you have a high DTI, the debt consolidation loans with the most favorable rates and terms are often secured loans. A secured loan requires collateral (something that serves as a guarantee that you’ll repay the loan). Collateral helps lower the risk for the lender. In turn, they may offer lower interest rates. Secured loans may have a longer repayment term compared to unsecured loans. A longer term could help you get a more affordable monthly payment. 

Home Equity Loans (HEL) and Home Equity Lines of Credit (HELOC)

Home equity loans and HELOCs are secured loans. The home is the collateral. Lenders are generally more willing to offer lower interest rates because of their lowered risk. Their longer repayment schedules help lower your payment as well. 

Where to Find Loans if You Have a High DTI

Several places you could find loans even if you have a high DTI include online lenders, your local credit union, and alternative lenders. 

Credit Unions and Community Banks

Many local community banks and credit unions may be more willing to work with you if you have a higher DTI. These types of financial institutions are there to serve the community, and that includes those who may not qualify for loans through traditional banks or lenders. 

That’s not to say you won’t have to meet minimum requirements. Rather, you may be able to work with a staff member who could work with you to see what you may be able to qualify for.

Online Lenders Specializing in High DTI borrowers

Some online lenders may be more willing to work with borrowers who have high DTIs. When doing your research, check to see if the lender has posted any minimum borrowing requirements. Get rate quotes from lenders who do a soft credit check that won’t affect your credit score.

Alternative Lenders and Peer-to-Peer Lending Platforms

Peer-to-peer lending platforms are where you can find individuals who lend money to others. You get to connect to people who may be willing to lend you money, and interest rate and repayment terms could vary. Alternative solutions like loans through private or microlenders could also be possible solutions. 

Strategies to Improve Your Chances of Securing a Loan

Working on your financial situation could help improve your chances of getting a loan. Consider some or all of the following strategies. 

Reduce Existing Debt

Working on lowering the amount you owe is one of the most common ways to lower DTI. When paying down debt, try your best not to take on any new loans for a while. Otherwise, your DTI may not change much.

Increase Your Income

Even with the same amount of debt payments, increasing your income will lower your DTI. When going this route, consider options like taking on more hours at work, negotiating for a higher salary, or starting a side business.

Consolidate Debts to Lower Your DTI

You may be able to lower your DTI if consolidating your debt means your monthly payments go down. Qualifying for a lower interest rate, for example, or extending your repayment terms could lower the amount you pay each month. 

Find a Co-Signer

A co-signer who has good credit could convince lenders to offer you a loan. Make sure you both understand what happens if you’re unable to pay back your loan. 

Tips to Get Approved for a Loan with a High DTI

Your DTI isn’t the only factor lenders look for when you apply for a loan. Consider the following best practices to help increase your chances of approval. 

Improve Your Credit Score Before Applying

Improving your credit score could show lenders you’re someone who pays their loans on time. Some ways to boost your credit score include:

• Check your credit report for errors and dispute them

• Make consistent on-time payments

• Limit how much you spend on your credit cards

Be Prepared to Explain Your DTI and Financial Situation

Some lenders may allow you to offer an explanation about your financial situation to show you’re a responsible borrower. For example, you may be able to explain why you have a high DTI and show you have the means to take on a new loan.

Compare Multiple Lenders to Find the Best Terms

Shopping around multiple lenders will help you learn what you may qualify for. That could make it easier to choose the loan with the best terms based on your financial profile. Getting prequalified—where lenders conduct a soft credit check—means your credit score won’t be affected. 

Consider Providing Collateral for Better Approval Odds

Putting up collateral like your car or another type of asset could make it easier to qualify for a loan. The risk is that if for some reason you can’t fully repay the loan, the lender could sell the collateral to recover the money you owe.  

Alternative Solutions if You Can't Secure a Loan

Debt Settlement Programs

If your debts have become unaffordable, look into debt settlement. This means you (or a company you work with) negotiate with your creditors to accept less than the full amount you owe, but consider it payment in full. Debt settlement may be a good option if you have a substantial amount of unsecured debt, are struggling or already behind on your payments, and have a financial hardship that makes it hard or impossible for you to afford your debts..

Credit Counseling and Debt Management Plans

Work with a credit counselor aligned with the National Foundation for Credit Counseling or the Financial Counseling Association of America. Your counselor could set up a debt management plan (DMP). You make a single monthly payment into the plan, and your counselor distributes it among your creditors. Your creditors agree to participate and halt collection efforts (as long as you’re making your payments). They may waive some fees or even lower your interest rate. But they won’t forgive any of your debt. You won’t be able to use credit cards while you’re still in the DMP.

Final Thoughts: Take Control of Your Debt With the Right Loan

It’s smart to understand your DTI and check on it now and then to ensure you're financially healthy. If you notice it creeping up, put the brakes on spending or borrowing before it harms your financial health.

Talk to a certified debt consultant today to get an expert opinion on the best way to handle your debt.