Most aspiring homebuyers know that their credit score is important, but many don’t realize that there is another financial number that they need to pay attention to if they hope to score a home loan: their debt-to-income (DTI) ratio. As the Consumer Financial Protection Bureau explains, a debt-to-income ratio that is greater than 43 percent is not ideal and can make purchasing your dream home more difficult. It is a state of affairs that is often referred to as the 43-percent rule, and knowing it gives you an advantage. Once you do, you can check your debt-to-income ratio before approaching a lender about a home loan. If it’s too high, then you have time to fix things by learning how to lower your debt-to-income ratio and taking action.
How to Lower Your Debt-to-Income Ratio
When you’re trying to figure out how to lower your debt-to-income ratio, it helps to understand how your DTI is calculated. Then, you can review strategies for lowering DTI and choose the ones that work best for your specific situation.
Calculating Your Debt-to-Income Ratio
To calculate your DTI, you add up of your all of your monthly debt payments. Then, you divide that amount by your gross monthly income. However, not every bill that you pay gets included in the pile. According to InCharge Debt Solutions, rent or mortgage payments, car loans, credit card debt, personal loans, and student loans are debts that should be added. In contrast, many normal household expenses don’t count. When calculating debts, don’t include monthly utilities, television and internet services, cell phone services, child care costs, health insurance, medical bills, car insurance, groceries, or entertainment expenses.
Improving Your Debt-to-income Ratio
What can you do to lower your DTI? Student Loan Hero offers several strategies:
- Check your credit report. Errors on your credit report can negatively impact your DTI. Check your credit report regularly. If you spot any inaccuracies, request corrections.
- Ask for a raise. Increasing your income is one way to lower your DTI. Try to negotiate a higher salary or wage or pick up extra hours to boost your income. As an added bonus, you can use the extra income to pay down your debts.
- Start a side hustle. If you can’t increase your income at your primary place of employment, consider starting a second job.
- Pay off debts with high “bill-to-balance” ratios first. Paying off debt will also drop your DTI. Focus on paying off bills that have payments that are larger portions of your debt first, as they may have a bigger impact on DTI. Sometimes referred to as the snowball method, the idea is to help free up debt obligations.
- Use a balance transfer to lower interest rates. Use a balance transfer offer to escape high interest rates and pay down debt faster. Many cards offer a period of 0-percent APR as an incentive for a set period, and it can be a great way to pay down debts.
- Pay off loans early. Taking steps to pay down loans early is an effective way to decrease your DTI.
- Refinance to pay down loans faster. If your credit score has improved, then you may be able to refinance or restructure your loans.
When you’re ready to buy a home, reach out to the home loan experts at PrimeLending West Texas. Our team will be delighted to help you find the right loan for your needs. Contact us today to get started.