While you can get a loan with a high debt-to-income ratio, you may have to apply for specific loans or work with a lender who accepts a high DTI. To lower your DTI, try refinancing or restructuring your current loans, using a balance transfer card, or applying for a loan with a cosigner.
If you’re trying to apply for a credit card or qualify for a loan, you’ve probably come across the term “debt-to-income ratio.” This term refers to how much debt you have versus how much you earn.
Your debt-to-income ratio (DTI) can impact whether or not your application for a loan is denied. If your ratio is considered high, then you might have a hard time finding a loan provider who will lend to you.
That said, lenders look at more than just your debt-to-income ratio when deciding whether to lend to you. Keep reading to learn more about what a DTI ratio is, how it can affect your chances of getting a loan, and how you can get a loan with a high debt-to-income.
What is a high debt-to-income ratio?
Your debt-to-income ratio is the amount of debt you are responsible for each month compared to your gross monthly income. Even though the number only provides a snapshot of your finances, most lenders use it as a way to measure lending risk.
A high DTI indicates that the majority of your income goes toward debt payments. With this in mind, you can understand why lenders would want to see a low DTI, especially if you’re attempting to take on more debt. The Consumer Financial Protection Bureau (CFPB) recommends a debt-to-income ratio of 36% or less for homeowners and 15% to 20% or less for renters (since renters don’t have to worry about mortgage payments). That said, the CFPB also states that some lenders will consider a debt-to-income ratio of 43% or higher.
Pro Tip
How is your DTI ratio calculated?
The calculation for DTI is pretty straightforward. First, add all of your monthly debt expenses. This might include auto loans, credit card debt, student loan payments, and a mortgage. For instance, if your existing debt includes a $2,000 monthly mortgage payment and a $500 car payment, then your total monthly debt payment is $2,500 ($2,000 + $500 = $2,500).
Next, determine your gross monthly pay. This is your monthly gross income before taxes are deducted. For this example, let’s say you make $7,000 per month before taxes.
Once you have those two numbers, you’ll divide your total monthly debt payments by your total monthly earnings to get your DTI. In this case, your debt-to-income ratio would be 35.7% ($2,500 ÷ $7,000 = 0.357).
Debt-to-Income Ratio (DTI) Calculator
How to get a loan with high debt-to-income ratio
There are some specific steps you can take to increase your likelihood of getting approved for a loan with a high debt-to-income ratio. Here are some you might want to consider.
1. Restructure or refinance
Debt-to-income ratio is calculated based on monthly debt payments. If you can lower your monthly payments, then it might lower your debt-to-income ratio. For example, if you have federal student loans, you might be able to set up an extended payment plan.
Another way to lower your monthly payments is by refinancing your current loan to get lower interest rates. Not only will this save you hundreds of dollars over the life of the loan, but you’ll likely also see a drop in your DTI ratio. Loans that are eligible for refinancing usually include mortgage loans, auto loans, and student loans.
2. Try a different lender
Sometimes a different lender can make all the difference. Debt-to-income ratio is only one part of your financial profile, and some lenders might have more flexibility when it comes to loan decisions.
Gabriel Lalonde, a seasoned financial expert and Certified Financial Planner, suggests that consumers with a high debt-to-income ratio should focus on finding a lender who is a good fit.
For instance, if you’re applying for a personal loan with a high DTI ratio, take some time to compare your available options before signing the dotted line. Using the tool below, you can even compare multiple loan options from one location.
3. Consider a balance transfer
A balance transfer is when you transfer debt from one or more credit cards to a new credit card with a competitive introductory annual percentage rate (APR). In order for this strategy to work, you’ll ideally get approved for a balance transfer card with a 0% introductory APR.
This will help reduce the number of payments you have each month (provided you combine debts from multiple cards) as well as lower the amount you spend on interest. These cards often require high credit scores for approval, but if you can get one, it might be a good option.
For example, if you have a $2,000 credit card balance with 20% APR and a two-year repayment term, your monthly payment would be $101.79. But if the APR drops to 0% due to a balance transfer, then your monthly payment would be $83.33 instead, reducing your debt-to-income ratio. Use the tool below to get a better idea of what 0% APR balance transfer cards are available to you.
What are the best loans to apply for with a high DTI ratio?
If you need a loan but are concerned about your debt-to-income ratio, then you might want to consider the following options.
1. Debt consolidation loan
Debt consolidation loans are personal loans that allow you to combine your debts in one place. Instead of having multiple loan payments, you’ll have one consolidated payment each month.
Depending on your credit score and report, these loans might be able to provide a lower interest rate. As a result, you might be able to pay off your debt faster and save money while doing it. Debt consolidation loans are often geared toward people with lower credit profiles, so they might be a good fit if you have a high DTI ratio.
2. Secured loan
A secured loan is any type of loan that uses collateral. For example, auto loans use the financed car as collateral, and mortgage loans are secured by the financed property.
Because the loan has collateral, the lender could recoup their funds if you default or fail to pay off your secured loan. This means these loans are often easier to qualify for. With that in mind, secured loans might be a good option if you have a high DTI ratio and are worried about getting approved.
3. Bad credit loan
Bad credit loans are designed for borrowers who are not able to get approved for other types of loans. If you’re worried about your DTI ratio and other credit factors that lenders consider during the application process, then you might consider a bad credit loan.
These loans do have potential downsides though, including high interest rates that might make it impossible to repay the loan in addition to less-than-ideal repayment terms. It might be a good idea to consider other loan options before considering these types of loans.
Pro Tip
4. Cosigned loan
Instead of focusing on a specific type of loan or lender, Lalonde suggests that borrowers focus on securing a cosigner: “Find a [cosigner] with a strong credit history and income. They will help you qualify for the loan, even with a high debt-to-income ratio.”
A cosigner is usually a friend or family member who agrees to sign the loan with you. This means that they are legally responsible for repaying the loan if you default on your payments. Since another person is tied to the loan, the lender assumes less risk and therefore may accept an applicant with poorer credit and a higher DTI.
5. FHA or VA mortgage loan
If you’re trying to get approved for a mortgage with a high debt-to-income, you have options. Lalonde advises that borrowers in this situation could consider government-backed loans such as FHA and VA loans.
Lalonde explains, “These types of loans have more lenient debt-to-income ratio requirements than conventional loans.” FHA, VA, and USDA loan programs are all aimed at helping consumers find a home within their financial limits. To get a better idea of how these loan programs differ from a conventional mortgage loan, take a look at the mortgage loans below.
How to reduce your DTI ratio quickly
When it comes to your debt-to-income ratio, there are really only two factors involved: your debt and your income. So it stands to reason that, if you’re interested in improving your debt-to-income ratio, the quickest way to do so is by increasing your income or decreasing your monthly debt obligations.
For a lot of people, paying down debt is the quickest way to make changes. It’s possible to get strategic about debt repayment and make changes fast. However, it usually requires a focused plan and dedication. If you have multiple loans, debt consolidation loans might be another option.
Another option is debt settlement. Though not every lender will agree to settle, some lenders may agree to accept less money than your entire loan balance. One of the best ways to go about this process is with the help of a debt settlement company. This company will speak with your lenders on your behalf and attempt to reduce your total debt balance or agree to more favorable loan terms.
FAQs
Can I get a personal loan if my debt-to-income ratio is high?
There are a variety of personal loans available, including loans for people with fair credit who may have a high DTI ratio. However, personal loans often have high interest rates and might include additional fees. Because of that, it’s a good idea to understand the lending terms and conditions before you apply.
What banks require a debt-to-income ratio?
All financial institutions and lenders have lending requirements, but the specific requirements vary between lenders. If you’re concerned about whether or not you’ll be approved for a loan, you might want to work with specific lenders who specialize in the field.
What is the highest loan-to-income ratio?
It’s possible to have a debt-to-income ratio of 100%. This would mean that your monthly debt payments are equal to your income. In fact, your debt could be higher than your income. But unfortunately, with a DTI of 100%, you likely won’t be approved for many loans.
Key Takeaways
- Lending requirements for debt-to-income ratio vary from lender to lender. However, the CFPB states that lenders typically won’t work with people who have debt-to-income ratios of 43% or more.
- Your debt-to-income ratio is only one part of your loan application. Lenders will look at other financial factors like credit score, collateral, savings, and loan terms.
- It is possible to get a loan with a high debt-to-income ratio. However, to do so you might have to work with specific lenders or settle for less-than-ideal terms.
- If you’re trying to increase your debt-to-ratio, you might want to try and pay down your debt or increase your income.
View Article Sources
- What is a debt-to-income ratio? — Consumer Financial Protection Bureau
- Should I refinance? — Consumer Financial Protection Bureau
- High Debt-to-Income Ratio Got Your Credit Card Application Denied? — SuperMoney
- How Much Debt Is Too Much? And What Can You Do About It? — SuperMoney
- How Does Your Debt-to-Income Ratio Impact Student Loan Refinancing? — SuperMoney
- How To Lower Your Monthly Mortgage Payment — SuperMoney
- Debt to Income Ratio: More Important Than Credit Score? — SuperMoney
- How To Qualify For A Personal Loan? — SuperMoney
- 7 Reasons Why Lenders Decline Your Loan Application — SuperMoney
- How To Get a Personal Loan With Fair Credit — SuperMoney
- How to Refinance Your Mortgage if You Have Good Credit, but You’re Underwater — SuperMoney
- How to Refinance Your Loans — SuperMoney
- How to Lower Monthly Payments — SuperMoney
- How To Get Out of Debt: Ultimate Guide to Being Debt Free — SuperMoney
Taylor Milam-Samuel is a personal finance writer and credentialed educator who is passionate about helping people take control of their finances and create a life they love. When she’s not researching financial terms and conditions, she can be found in the classroom teaching.
