5 Ways to Lower DTI
Summary: Your debt-to-income ratio (DTI) is important when applying for a home mortgage. DTI is calculated by adding together the proposed home loan monthly payment along with your credit card, auto and installment payments divided by your gross monthly income. How high a DTI ratio can be depends on the type of home loan you are seeking whether is be a conventional, FHA, VA, USDA or Jumbo loan.. If you find yourself with a high ratio, try these tips: increase your minimum payment, avoid additional spending, earn a little extra money, take advantage of a transfer balance, or recalculate your DTI monthly to notice progress.
If you are in the market for a car or a housing loan, and are a first-time home buyer or a seasoned buyer, Debt-to-Income (DTI) is a key factor that is considered when applying for the home loan.
How high your DTI ratio can be depends on the home loan type. For example, conventional loans have a DTI cap of 45% while FHA loans have a cap of 55%. If your DTI ratio is too high for your loan type, here are a few ways to lower it.
1. Increase Your Payment Amount
Paying a little more than the minimum each month can help to pay off debt quicker. There are a few known methods, like the avalanche or the snowball theory, to help pay off debt. The avalanche theory advises individuals to pay off the highest interest debt first and then focus on the smaller ones. Meanwhile, the snowball strategy recommends individuals pay off smaller debts first and then build their way to pay off higher-interest ones. Both strategies can be effective in helping you reach your financial goal.
2. Avoid More Spending
It can be very tempting to make large purchases in anticipation of your upcoming home loan. But purchasing costly items will increase your monthly debt. Postponing these purchases until you have closed on your loan will be a better financial decision. You can also do a deep dive into your monthly expenses and see where excess money is being spent like monthly subscriptions.
3. Earn Extra Money
Earning extra money through a second job or negotiating for a higher salary can help to pay off debts quicker and lower your DTI. The additional money you make can be used towards paying off your monthly debt.
4. Use a Balance Transfer
Another way to lower your DTI is to take advantage of a transfer promotion. You can transfer your credit card debt onto a card that has zero interest for a limited time and start paying off your debt. Since the card will not have interest for a limited time, all the payments you make will go directly to your balance. Two things to keep in mind with this option: (1) watch out for any transfer fees and (2) make sure you pay off your debt before the promotion is over and interest begins to accrue.
5. Recalculate Your Debt
Check-in on your debt monthly to assess if your ratio is increasing or decreasing. If your DTI is increasing, dig deeper into the spending and pinpoint places where you can cut back. If your DTI ratio is decreasing and begins to align with the DTI ratio set by your loan type, that is great! Continue the methods or strategies you are using to lower your debt till you have met your loan type’s DTI requirement.
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