How to Get a Consolidation Loan with a High DTI
- Your debt-to-income ratio, or DTI, equals housing and debt payments divided by gross (before-tax) income.
- Most lenders set maximum DTIs between 37% and 50%.
- You can lower your DTI by consolidating debt, paying down balances, or increasing your income.
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If you’re like most consumers, you’ve never heard of a DTI. Until you get turned down for a loan because your DTI was too high. So what is a DTI, anyway?
DTI stands for debt-to-income ratio. It’s a percentage that indicates how much of your monthly income goes to certain monthly expenses. And it’s a number you should understand before you apply for another loan.
How to calculate debt-to-income ratio
Calculating your DTI is pretty simple. DTI is your monthly expenses divided by your gross (before-tax) income. But it’s important to know which expenses go into the calculation and which don’t.
The expenses that count in a DTI are monthly payments for all your loans, obligations like alimony and child support, and housing costs. Here’s a list of expenses that you’d include in a DTI if you have them:
Monthly mortgage payment including principal, interest, taxes, insurance, and homeowners association dues
Minimum payments on credit card accounts
Auto loan payment
Student loan minimum payment
Personal loan payment
Spousal and child support payments
And here are examples of costs that you would NOT include in a DTI:
Expenses paid by your business and deducted from business income
Discretionary spendings like streaming services, gym membership and the like
Loans against your 401(k)
Contributions to retirement accounts
Once you total up the monthly payment for your expenses, you’ll add up your gross monthly income. Here are the standard calculations for different types of earnings:
Annually: Annual gross pay / 12 months
Monthly: Use monthly gross payment amount
Twice monthly: Twice monthly gross pay x 2 pay periods
Biweekly: (Biweekly gross pay x 26 pay periods) / 12 months
Weekly: (Weekly gross pay x 52 pay periods) / 12 months
Hourly: (Hourly gross pay x average # of hours worked per week x 52 weeks) / 12 months
Self-employed consumers take their annual taxable income, add back “paper” expenses like depreciation, and divide by 12.
The DTI calculation is easy once you know your total income and expenses. If your monthly gross income is $4,000 per month, and your total expenses are $2,000, your DTI is 50%.
$2,000 / $4,000 = .5 (or 50%)
What is a high debt-to-income ratio?
Lenders limit DTI. A high DTI means you might not have enough money coming in to safely and easily cover your expenses and pay your bills. You’re living a little too close to the edge for their comfort.
What is a high DTI? It depends on the lender and the type of loan you’re pursuing.
Most mortgage lenders in the US rely on guidelines from Fannie Mae and Freddie Mac. These loans are called “conforming mortgages.” Their maximum DTIs depend on the borrower’s down payment and credit score, ranging from 36% to 45%. FHA borrowers may get approved with a DTI as high as 57% if the lender agrees and the borrower is otherwise highly-qualified.
Typical unsecured personal loan vendors set their maximum DTI between 35% and 43%, while a few will go as high as 50%. The maximum lenders will apply to you often depends on additional factors like your credit score. Credit card issuers don’t necessarily consider your DTI—some do, and many don’t. Auto lenders are somewhat protected because the loans are secured by vehicles and limit DTI to 45%-50% for consumers with credit issues.
Types of loans for a high DTI
It’s important to understand that what lenders consider a high DTI for one customer might not be excessive for another customer. You have a better chance of loan approval with a high DTI if your credit is excellent, your income is stable, and you have some savings. Besides, DTI is less of an issue for secured loans like mortgages and auto financing.
Debt consolidation loan with high DTI
Debt consolidation can be a challenge if you have a high DTI. That’s because the most common type of high-interest debt—credit cards—also comes with low minimum monthly payments designed to keep you paying year after year.
A consolidation loan is designed to be paid off in a finite amount of time. This means that even a loan with a lower interest rate can have higher payments, which won’t do your DTI any favors.
If you have a high DTI, the best debt consolidation loans are usually secured. This helps lower your interest rates, and their terms are long enough to keep your payments manageable.
Home equity loans come with some of the lowest interest rates because they are among the safest loans for lenders. Their longer repayment schedules help lower your payment as well. However, you should pay the loan off as quickly as possible because paying a loan over 15-to-30 years blows up the total interest cost.
Similarly, home equity lines of credit (HELOCs) can offer a low introductory rate and the chance to pay down your debt much faster.
Personal loans with five-year or longer terms may help you clear your debt and pay less interest without an extreme payment increase. You may be offered better terms with a cosigner or if you pledge some collateral.
If you have excellent credit, balance transfer credit cards may offer the chance to pay no or low interest for six to 24 months. Use this time to pay off as much of your credit card debt as possible.
The loans available to you depend on your credit score and income. You may need to pay down your balances or increase your credit score to get the consolidation loan with the terms you want.
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What if you can’t get a debt consolidation loan with a high DTI?
If your DTI, credit score, or other factors cause you to be declined for debt consolidation loans, you still have options.
Work with a credit counselor aligned with the National Foundation for Credit Counseling or the Financial Counseling Association of America. Your counselor can set up a debt management plan (DMP) that lowers your monthly payments and interest rates. You make a single monthly payment into the plan, and your counselor distributes it among your creditors. Make sure you can afford the payments and that the fees are reasonable.
If your debts have become unaffordable, look into debt settlement. A debt settlement counselor can negotiate with your creditors to accept less than you owe as payment in full. Debt settlement may be a good option if you have a substantial amount of unsecured debt and are several months behind on your payments.
Filing for Chapter 7 (liquidation) bankruptcy or Chapter 13 (reorganization) bankruptcy is another solution for reducing what you pay to clear your debt. Bankruptcy happens through the court system, so your creditors can't opt out of participating the way they can with debt management or debt settlement.
It’s smart to understand your DTI and check on it now and then to ensure you're financially healthy. If you see it creeping up, put the brakes on spending and borrowing before it harms your financial health.
What is a high debt-to-income ratio?
It depends on the lender and the loan. For an unsecured personal loan, many lenders consider 40% high. But that’s not high at all for an FHA home loan. Here's a list of typical maximum DTIs for different types of loans:
Conforming mortgage: 36% to 45% depending on down payment and credit score
FHA home loan: Up to 57%, but most lenders set their limit lower
Unsecured personal loan: 40%
Auto loan with credit issues: 50% (with good credit, DTI doesn’t matter as much)
Almost all lending guidelines consider a DTI of 36% or lower to be safe.
What do I do if my DTI is too high?
First, stop spending more than you earn and increase your balances.
Second, look for ways to pay down your balances faster:
Consolidate debts to a lower interest rate.
Request an interest rate reduction and put more into reducing your balance.
Take on more hours at work or a side gig to earn more.
Sell unused things and use them to reduce your balances.
Take a look at your budget and focus on ways to spend less, like canceling services you don’t need and finding cheaper options for those you do.
Choose one or more “wants” to give up until your debt is paid off or your DTI reaches a target. Put the savings toward your debt.
Can you get a mortgage with 55% DTI?
It’s possible to get approved for an FHA home loan with a 55% DTI. However, lenders aren't obligated to make those loans, and many set their maximum DTI at a lower level. You have a better chance if you can show several “compensating factors.”
Little or no increase in housing cost. If the new mortgage payment, including principle, interest, taxes and insurance, isn’t much higher than your current mortgage or rent expense, it tells lenders that you can handle the monthly housing obligation even if your DTI is high.
Emergency savings to cover at least two months of mortgage payments. This shows that you can make your mortgage payment even if your income is interrupted briefly.
An excellent credit score, illustrating that you manage debt well.
A larger down payment, which reduces the lender’s risk.
Good work history and steady income, demonstrating that you’re less likely to experience cash flow problems.