The Best Things You Can Do To Lower Your Debt-To-Income Ratio

You may believe you are a strong loan candidate if you have decent credit and a stable income, but there may be a crucial component you are overlooking. A financial metric used by lenders to determine if you can afford further loan payments is your debt-to-income (DTI) ratio.

Here are some reasons why that matters and suggestions for how to deal with your DTI if it’s keeping you from securing a new loan.

Why Is Your DTI Important?

When your DTI ratio is low, you have enough income to cover making another regular payment.

According to the Consumer Protection Finance Bureau, the ideal DTI is 36%. In general, lenders won’t approve you for a loan if your ratio is higher than 43%.

Your DTI will be one of the most important criteria lenders will take into account if you’re looking for the best mortgage rate, a personal loan, or a new credit card.

What Should You Do To Lower Your DTI Ratio?

Before submitting an application for a new loan, you might want to think about lowering your ratio if it is somewhat (or much) greater than the recommended percentage.

Similar to credit ratings, you are not forced to accept a subpar result. You can take several practical, easy steps right now to increase your borrowing capability.

Pay Off Your Loans Early

Make a list of everything you owe and plan your repayment schedule.

If you’ve had the loan for a while, you likely haven’t given your monthly payments much thought. However, it’s a good idea to increase your payments by a few dollars if you have the means to pay off your loan early.

Cut Your Budget And Bring In More Income

You should also cut back on the smaller things that pile up, even if you don’t have any plans to purchase a new vehicle or take out a new loan. Living on a limited budget should not be considered a punishment.

The majority of our suggestions have focused on reducing your debt, but one more approach to lowering your debt-to-income ratio is to earn more money.

There are ways to make money without having a job, such as renting out your home through Airbnb. If you are employed, you may try asking for a raise.

Extend Your Payments & Consolidate Your Debt

If you don’t have the money to repay your loan more quickly, you can request your lender to extend the term instead. By doing this, you can lower your monthly payments, and this should cause your DTI to decline.

Combining your debts may help you manage them better if you have a lot of obligations with varying interest rates and due dates throughout the month. One choice is a credit card offering a 0% APR rate on balance transfers. You may be able to pay off your high-interest debt more quickly by combining all of your payments into one.

As we’ve already mentioned, interest rates significantly impact the cost of borrowing money. Applying for a debt consolidation loan with a reduced interest rate will hasten the process of paying off your debt and reducing your DTI ratio.

Say “No” To New Debt And Large Purchases

You should refrain from making any significant purchases if you wish to minimize or maintain your DTI ratio.

The present is not the time to purchase a new automobile, apply for a new credit card, or begin home improvement projects, particularly if you are considering obtaining a mortgage.

Even if you can afford it, adding to your credit card load or taking on new debt will only increase your debt-to-income ratio (DTI). Consider putting off any large purchases for the time being.