Ways to Lower Your Debt to Income Ratio

Last Updated 1/21/2015

One of the biggest factors on a mortgage loan application is the debt to income ratio. This ratio is calculated by dividing the total monthly credit obligations by the total gross monthly income. Lenders use this number to assess whether or not you’ll be able to afford your new monthly payment.  The lower the debt to income ratio is, the better. Here are some ways to lower your debt to income ratio before applying for a mortgage.

Pay off debt.

The best way to lower your debt to income ratio is the pay off debt. To make a big difference in your debt to income ratio, pay off an installment loan that has a high payment. For instance, a car loan with a balance of $4500 and a payment of $400 will make a big impact on your debt to income ratio once its paid off. Also, pay down the amount of your revolving debts to lower the minimum payments due.

Sell your car.

Car loan payments are usually several hundred dollars and are the biggest payment other than a housing payment. If you want to lower your debt to income ratio quickly, sell your car and pay off your car loan. In the meantime you can buy a cheap car for cash. This may seem like a big sacrifice to make, but it will really make a big difference.

Reduce your student loan payments.

There are a couple of ways you can reduce your student loan payments. The first is to consolidate your loans. Student loans can often have a high payment in comparison to the loan amount. For instance a loan with a balance of $1200 may have a payment of $50. Consolidating 5 small student loans like this will make a big difference. If you have several large student  loans you may want to discuss your options of reducing your payments with your lender.

Avoid taking on any more debt.

When you are trying to lower your debt to income ratio, you should avoid taking on any more debt. This can take a lot of will power and discipline, but adding to your debt will only increase your debt to income ratio.

Increase your income.

This is simple math, the higher your income is, the lower the ratio between your credit obligations and income will be. Getting a raise, picking up extra work or working overtime, are a great way to increase your income and lower your debt to income ratio.

Reduce requested loan amount.

If you’ve tried all of the other options above and your debt to income ratio is still too high, it may be time to consider lowering your requested loan amount. You may neet to adjust your expectations with what you can currently afford given your financial situation. Speak with your mortgage professional about what loan amount will give you an acceptable debt to income ratio.

Take the actions listed above to lower your debt to income ratio. You can try everything that’s listed or just what works for you. Having a good debt to income ratio will greatly increase your chances of being approved for a mortgage.