5 Options for people with High Debt to Income

With mortgage interest rates at lows that haven’t been seen in years, many people have or already trying to take advantage of these rates. Some, are running into issues with qualifying for Loans with lenders as they have a High Debt to Income Ratio.  If this is your situation, Here are 5 options for people with High Debt to income.

1. Try a more forgiving program

Different programs come with varying DTI limits. For example, Fannie Mae sets its maximum DTI at 36 percent for those with smaller down payments and lower credit scores. Forty-five is the limit for those with higher down payments or credit scores.
FHA loans, on the other hand, allow a DTI of up to 50 percent in some cases, and your credit does not have to be top-notch.
Likewise, USDA loans are designed to promote homeownership in rural areas — places where income might be lower than highly populated employment centers.
Perhaps the most lenient of all are VA loans, which is zero-down financing reserved for current and former military service members. DTI for these loans can be quite high, if justified by a high level of residual income. If you’re fortunate enough to be eligible, a VA loan is likely the best option for high-debt borrowers.

2. Restructure your debts

Sometimes, you can reduce your ratios by refinancing or restructuring debt.
Student loan repayment can often be extended over a longer term. You may be able to pay off credit cards with a personal loan at a lower interest rate and payment. Or, refinance your car loan to a longer term, lower rate or both.
Transferring your credit card balances to a new one with a zero percent introductory rate can lower your payment for up to 18 months. That helps you qualify for your mortgage and pay off your debts faster as well.
If you recently restructured a loan, keep all the paperwork handy. The new account may not show up on your credit report for thirty to sixty days. Your lender will need to see new loan terms to give you the benefit of lower payments.

3. Pay down (the right) accounts

If you can pay an installment loan down so that there are fewer than ten 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 reduction 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 nine percent 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.
Total payment reduction is $70 per month, which in some cases could turn a loan denial into an approval.

4. Cash-out refinancing

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 DTI.
When you close your refinance mortgage, checks are issued directly to your creditors. You may be required to close those accounts as well.

5. Get a lower mortgage rate
One way to reduce your ratios is to drop the payment on your new mortgage. You can do this by “buying down” the rate — paying points to get a lower interest rate and payment.
Shop carefully. Choose a loan with a lower start rate, for instance, a 5-year adjustable rate mortgage instead of a 30-year fixed loan.
Buyers should consider asking the seller to contribute toward closing costs. The seller can buy your rate down instead of reducing the home price if it gives you a lower payment.
If you can afford the mortgage you want, but the numbers aren’t working for you, there are options. An expert mortgage lender can help you sort out your debts, tell you how much lower they need to be and work out the details.

Mortgage options for borrowers with a high DTI

It’s possible to still qualify for a mortgage if your debt-to-income ratio slightly exceeds the general requirements mentioned above. Below, we highlight a few mortgage products available to high-DTI-ratio borrowers.

Fannie Mae HomeReady® Mortgage

This low down payment loan product from government-sponsored enterprise Fannie Mae allows a maximum back-end DTI ratio of 45% for manually underwritten loans. Depending on your credit score and down payment amount, you may also need to show you have a few months of cash reserves saved up.

Freddie Mac Home Possible® Mortgage

Similar to Fannie Mae’s HomeReady® product, GSE Freddie Mac offers the Home Possible® mortgage that allows a maximum 45% DTI ratio for loans that are manually underwritten.

FHA Mortgage

Home loans backed by the Federal Housing Administration allow borrowers to have DTI ratios up to 50% if they supply a down payment of at least 10%.

Other important mortgage eligibility requirements

While debt-to-income ratios can make or break a prospective borrower’s chances at buying a home, there are several other mortgage requirements that matter to the loan application process. Here’s a quick rundown of some of the most important must-haves:

• Credit score: Prepare to have a credit score of at least 620 for a conventional loan and 580 for an FHA loan. It’s possible to qualify for an FHA mortgage with a score as low as 500, but you’ll have to make a larger down payment.

• Down payment: Save for at least a 3% down payment, or higher if your credit score means you’ll need to put more money down. However, keep in mind that you’ll need to account for mortgage insurance for down payments that are less than 20%.

• Employment and income: You’ll need to have proof of a steady job and income in order to qualify for a mortgage. Gather your pay stubs and tax returns to demonstrate your capacity to take on a mortgage.

The bottom line

Mortgage lenders are tasked with establishing your ability to repay a mortgage, and that includes reviewing your existing debt load and how your hypothetical mortgage would fit into your current financial picture.

If you’re anxious about your debt-to-income ratio percentages, take action to increase the money you bring in monthly and decrease your credit card and loan balances to more manageable amounts.