How to lower your Debt-To-Income Ratio?
Why should I lower my Debt-To-Income Ratio (DTI)?
If you are considering purchasing a home or refinancing a mortgage home loan, then it is important that you have the financial ability to repay the loan.
Credit providers like mortgage lenders, banks and other financial institutions use a simple but effective ratio to determine your ability to repay the loan, Debt-To-Income Ratio (DTI).
If you have been denied a loan request because the mortgage lender has verified that your gross monthly income is too low compared and you have other monthly debt obligations than you maybe able to lower your debt-to-income ratio, by following this simple guide.
When you lower your debt-to-income ratio you will be on your way to getting pre-approved to purchase or refinance your home. While working on lowering your debt to income ratio consider this Home-buyers Checklist for mortgage pre-approvals.
The 4 ways to lower your Debt-To-Income
1. Pay down installment loan balances to lower DTI
Installment loans have fix terms, and a fixed monthly payment plan. These Installment loans are typically loans like, auto loans and personal loans.
Any installment loan that has only 10 payments or less remaining on the loan, will be omitted from your list of monthly debt obligations when calculating your debt-to-income ratio.
This means that if you have 13 payments remaining on your auto loan, you make 3 car payments today, and the mortgage lender can now lower your debt to income ratio by not counting your auto payment in your debt to income.
2. Lower the interest rate on debts to lower your monthly payments for DTI
Credit Card Debts:
Most credit card companies will decline your request to lower your interest rates, even when you have made all payments on time. However, it is worth the call.
If the credit card company declines your request to lower the interest rate which will lower your monthly payment, then you have the option to transfer your balance to a new credit card offer that has zero percent for the first 12 months. This will lower your monthly payment and your DTI ratio.
How to transfer Credit Card Balance to 0% credit card offer to lower DTI?
Look for credit card offers in the mail or online that offer 0% interest rates for the first 12 months. When you find this credit card company simply request a balance transfer.
How to consolidate Credit Card Debt using a Personal Loan to lower Debt To Income Ratio?
Another choice you can make is to consolidate your high-interest debt into one personal loan with a lower interest rate. For example, if you have three credit cards holding an interest range of 15%-17%, getting a personal loan at 5% and using the funds to pay off those credit cards could lead to more savings as well as reduce your DTI quickly.
This way, you'll be able to clear your debts faster than usual!
3. Stop using credit cards to lower your monthly payments
Sometimes the best move is to "stop." Stop buying things because you want them rather than need them.
Stop giving money away when you have debt you should be paying off. If you find yourself pulling out a credit card for non-necessities, consider cutting up your credit cards.
Make the decision to pay off your credit card balances as fast as possible to lower your monthly payments and debt to income ratio.
4. Increase your monthly income to lower your debt to income ratio
Ask for an income raise from your current employer
Either seek a job promotion with your current employer or ask for a long overdue raise. In many cases, when employees sit down with their supervisor and explain the sound reasons why they should be consider for a raise; coupled with your intentions to purchase a home, many employers will concede to the request.
Take a second job to increase monthly income and lower your DTI
Under the Federal Housing Administration underwriting guidelines, part-time employment income maybe included even when the part-time employment history is less than 2 years as defined in HUD 4155.1 chapter 4. Section D.
However, the mortgage lender must document the probability that this new part-time employment will continue.
Summary for Lowering Debt-To-Income Ratio
The benefits of lowering your debt-to-income ratio to qualify for mortgage loans, and other financial services may have a substantial impact on the health of your finances. Just consider how much the average home has appreciated year over year. How much income you need to purchase a home also depends upon how much your monthly debt obligations total compared to your income.
Annualized appreciation on assets is a wealth building opportunity that can only be utilized when you can demonstrate to the financial institution that you have the ability to repay the loan.
Therefore, lowering your debt-to-income-ration is the centerpiece to obtaining financial prosperity.
