Having a high debt-to-income (DTI) ratio can make it challenging to qualify for a personal loan, mortgage, or other financing Lenders prefer to see DTI ratios below 36% for approval But there are still ways to get loans if your ratio is higher.
In this comprehensive guide, we’ll explain what debt-to-income ratio is, ideal levels, and most importantly, 8 proven strategies for securing a loan when your DTI is too high
What is Debt-to-Income Ratio?
Debt-to-income ratio compares your monthly debt payments to your monthly gross income. It’s a key factor lenders use to assess your ability to manage additional borrowing
The formula is:
DTI = Monthly Debt Payments / Monthly Gross Income
For example, if your monthly debt payments total $2,000 and gross monthly income is $5,000, your DTI is:
$2,000 / $5,000 = 0.4 or 40%
A lower ratio indicates more disposable income available to cover new loan payments. That’s why lenders prefer to see DTIs under 36%.
Why Your Debt-to-Income Ratio Matters
Debt-to-income ratio matters because it directly impacts loan qualification and terms.
The higher your DTI:
- The lower loan amount you may qualify for
- The higher interest rates and fees you’ll likely pay
- The harder it will be to get approved at all
Lenders view high ratios as a sign of increased default risk. After all, if your existing debts already consume a large portion of your earnings, it may be difficult to afford additional borrowing.
That’s why getting a loan with a high DTI requires special strategies.
How to Calculate Your Debt-to-Income Ratio
Follow these steps to calculate your personal DTI ratio:
1. Document Your Monthly Gross Income
Add up all sources of income before any deductions or taxes. For salaried jobs, gross income is your salary. For self-employment or side gigs, use your average net monthly profit.
Be sure to include all income sources – full-time and part-time jobs, bonuses, investment returns, etc. Do not include any income you cannot document or prove.
2. Total Your Monthly Debt Payments
Include the minimum monthly payments due on all existing debts:
- Auto loans
- Credit cards
- Personal loans
- Student loans
- Mortgage
- Home equity loans
- Child support
- Alimony
If you pay debts like credit cards in full each month, use the minimum due instead of full balance.
3. Divide Total Debt by Gross Income
Use the DTI formula above. Take total minimum monthly debt payments and divide by gross monthly income.
This percentage represents your individual debt-to-income ratio. Generally, the lower the better for loan qualification.
Ideal Debt-to-Income Ratio for Loan Approval
Here are general DTI recommendations for loan approval:
- Mortgages – 36% or lower
- Auto Loans – 15% or lower
- Personal Loans – 40% or lower
- Credit Cards – 30% or lower
These thresholds aren’t set in stone. Some lenders may approve mortgages up to 43% DTI or auto loans near 20% DTI. But staying under 36% total DTI is ideal for the highest loan amount and best terms.
Now let’s review proven strategies for securing a loan when your ratio exceeds these recommended levels.
8 Ways to Get a Loan With a High Debt-To-Income Ratio
- Apply for secured personal loans
- Use a creditworthy co-signer
- Provide proof of assets or cash reserves
- Refinance existing debts to lower payments
- Make a large down payment if seeking a mortgage
- Opt for a shorter-term loan
- Seek loans from community banks or credit unions
- Improve your credit score
Let’s explore each approach more closely.
1. Apply for Secured Personal Loans
Secured loans require an asset as collateral and tend to be more attainable for borrowers with higher DTIs. Options include:
-
Secured credit cards – Require a refundable security deposit. Help establish credit.
-
Auto title loans – Use your paid-off car as collateral. Interest rates are usually very high.
-
Home equity loans or lines of credit – Your home serves as collateral. Limited to 80% of home equity in some states.
-
401(k) loans – Borrow against your retirement account balance. Must be repaid.
Always read the fine print so you understand repayment requirements and the consequences of default before pursuing a secured loan.
2. Use a Creditworthy Co-signer
Asking a person with good credit to co-sign your loan can improve the chances of approval. Their income, credit score, and lower DTI strengthens the application.
But co-signers share equal responsibility for repayment. Default can negatively impact their credit and jeopardize their own ability to borrow. Approach potential co-signers cautiously.
3. Provide Proof of Assets or Cash Reserves
Lenders may approve higher DTI ratios if you have substantial assets, like:
- Sufficient cash in checking/savings accounts
- Sizeable investment portfolio
- Ownership stake in a business
- High home equity
Large cash reserves indicate your ability to cover payments during income disruptions. Documentation of assets gives lenders more confidence to approve higher DTIs.
4. Refinance Existing Debt to Lower Payments
Refinancing replaces existing loans or credit cards with a new loan at better terms. This consolidates debts into one payment at a lower interest rate, reducing your DTI.
Target high-interest accounts like credit cards first. Even a couple percentage point drop in rates can substantially decrease monthly payments and DTI.
5. Make a Large Down Payment if Seeking a Mortgage
Putting down 20-30% or more on a home purchase reduces the amount you need to borrow. This lowers mortgage payments to improve DTI ratios.
While not required, larger down payments show lenders you can manage your finances responsibly. Save up your down payment before applying.
6. Opt for a Shorter-Term Loan
Pick the shortest loan term you can reasonably afford. Shorter terms require higher monthly payments but lower interest costs overall.
For instance, a $10,000 personal loan at 10% interest:
- 5-year term has ~$210 monthly payments
- 3-year term has ~$290 monthly payments
The shorter term has higher payments but less interest paid over the life of the loan. Your higher income-to-debt ratio improves.
7. Seek Loans from Community Banks or Credit Unions
Large national lenders tend to adhere to strict DTI requirements. But smaller community banks and credit unions may offer more flexibility.
Their local focus and relationship-based approach improves the chances of approval despite higher debt ratios. They know the local community and your personal circumstances.
Provide strong evidence you can repay the debt. Clean up your credit report. Then meet with a local lender to make your case.
8. Improve Your Credit Score
Any extra points you can add to your credit score will help counterbalance a high DTI. Aim for at least a 670 FICO score.
Tips to boost your score include:
- Pay all bills on time
- Pay down credit card and revolving debt
- Limit new credit applications
- Correct any errors on your credit reports
Given time, diligent credit management can offset some DTI challenges.
Other Tips for Loan Approval With High DTI
Here are a few final tips that may sway lenders to approve loans despite elevated DTIs:
- Provide letters explaining income variances or reasons behind credit issues
- Show consistent income over several years
- Put up an asset not needed as collateral
- Apply with a family member at the same lender
The keys are reassuring lenders you can truly afford the loan and managing risk on their end. Do this, and your high debt ratio won’t be a deal breaker.
Seek Professional Guidance
If you still struggle to get approved, seek help from experts who specialize in high-DTI lending:
-
Mortgage brokers – Access lenders with high-DTI programs. Shop your application for the best terms.
-
Non-profit credit counselors – Get guidance managing debt and improving finances long-term.
-
Debt management services – Set up customized debt repayment plans to systematically lower DTI over time.
Their know-how can prove invaluable in constructing an approvable loan application despite debt ratio challenges.
Should You Take on More Debt With a High DTI?
Before pursuing new loans, carefully consider whether added debt is truly in your best interest. Just because you can qualify doesn’t
Pay down the right accounts
If you can pay an installment loan down so that there are fewer than 10 payments left, mortgage lenders usually drop that payment from your ratios.
Or you can reduce your credit card balances to lower your monthly minimum.
You want to get the biggest bang for your buck, however. You can do this by taking every credit card balance and dividing it by its monthly payment, then paying off the ones with the highest payment-to-balance ratio.
Suppose you have $1,000 available to pay down the debts below:
| Balance | Payment | Payment-to-balance ratio |
| $500 | $45 | 9.0% |
| $1,500 | $30 | 2.0% |
| $2,000 | $50 | 2.5% |
| $3,000 | $150 | 5.0% |
The first account has a payment that’s 9% of the balance — the highest of the four accounts — so that should be the first to go.
The first $500 eliminates a $45 payment from your ratios. You’d use the remaining $500 to pay down the fourth account balance to $2,500, dropping its payment by $25.
The total payment reduction is $70 per month, which in some cases could turn a loan denial into an approval.
If you’re trying to refinance but your debts are too high, you might be able to eliminate them with a cash-out refinance.
The extra cash you take from the mortgage is earmarked to pay off debts, thereby reducing your debt-to-income ratio.
When you close on a debt consolidation refinance, checks are issued directly to your creditors. You may be required to close those accounts as well.
Tips to get a loan with a high debt-to-income ratio
Before you apply for a mortgage, there are a few strategies you can use if your debt-to-income ratio is high.
Boosting your income is a practical approach to lowering your DTI ratio. Consider exploring opportunities like a side job, additional hours at your current workplace, or freelance work. Remember, lenders often prefer to see a consistent income history, typically around two years, for each source of income. This increase can significantly help in reducing your DTI, especially when applying for mortgages that cater to high debt-to-income ratios.
How to Get a Loan with High Debt-to-Income Ratio (What Is the Debt-to-Income (DTI) Ratio?)
Can you get a loan with a high debt-to-income ratio?
A high DTI, on the other hand, suggests a higher level of debt relative to income and may raise concerns about an applicant’s ability to manage further debts. Even if you have a high debt-to-income ratio, there are still loans you could qualify for. Below are some types of high debt-to-income ratio loans that could be accessible to you.
What constitutes a high debt-to-income ratio?
Your debt-to-income ratio (DTI), or DTI, is as important as your credit score and job stability to qualify for a home loan. In 2022, a high DTI was the most common primary reason lenders denied mortgage applications, according to NerdWallet’s analysis of the most recently available federal mortgage data. A high DTI refers to a situation where a significant portion of your monthly income goes towards paying off debts.
Can I get a debt consolidation loan with a high debt-to-income ratio?
If you are stuck with a high debt-to-income ratio, you may find it difficult to qualify for a debt consolidation loan. Consider other ways to solve the problem, including consolidating through a debt management program. Home » Credit Card Debt Relief » Debt Consolidation » Consolidating Debt and Loans with a High Debt-to-Income Ratio
Why do Lenders look at debt-to-income ratios?
Lenders consider debt-to-income ratios because research shows borrowers with high DTIs have more trouble making consistent payments. Each lender sets its own DTI requirement, but not all creditors publish them. Generally, a personal loan can have higher allowable maximum DTI than a mortgage.