How to Get a Loan With a High Debt-to-Income Ratio

Getting a home loan with a high debt-to-income ratio is possible

Buying a house with a high debt-to-income ratio is possible but it can be more challenging. 

When you apply for a mortgage, the lender will make sure you can afford it. Doing so involves comparing your debts and your income — formally called your debt-to-income ratio, or DTI.

If your DTI is too high, you could have a hard time getting approved for a home loan. However, there are ways to make the numbers work, even with a higher DTI.

In this article (Skip to...)

• Calculating DTI
• Home loan DTI limits
• Getting a loan with high DTI
• High-DTI mortgage loans
• Lowering your DTI
• FAQ

What is debt-to-income ratio (DTI)?

Your debt-to-income ratio (DTI) is a financial metric that lenders use to evaluate mortgage loan applications. It compares your monthly debt payments to your gross monthly income, helping assess your ability to manage existing debt obligations and take on new debt, such as secured loans or home equity loans.

For borrowers, especially prospective homeowners, a high DTI ratio can be problematic. It suggests that a large portion of your monthly income is already committed to various types of debt, leaving less room for a new loan payment. This can make you appear riskier to lenders, potentially affecting your creditworthiness and loan approval.

When a borrower applies for a home loan, mortgage lenders consider two types of debt-to-income ratios.

Front-end DTI

Front-end DTI only considers housing-related expenses (potential monthly mortgage payment, property taxes, homeowners insurance, and HOA fees) relative to your gross monthly income.

Lenders often prioritize multiple factors in mortgage applications, with the front-end ratio receiving relatively less attention, except in specific cases like FHA loans. 

Back-end DTI

Back-end DTI is more commonly used during a mortgage loan application because it provides an overall view of your creditworthiness and monthly debt obligations, including credit cards, student loan payments, debt consolidation loans, auto loans, and personal loans.

Your debt-to-income ratio typically doesn’t include basic household expenses or monthly bills for utilities, groceries, dining out, and entertainment. Instead, the types of debt DTI focuses on are minimum monthly payments from lines of credit that are regular and recurring.

How to calculate debt-to-income ratio

Calculating your debt-to-income ratio is fairly straightforward:

• Monthly debt payments / monthly gross income = X * 100 = DTI ratio

Example: if your total monthly debt payments are $2,000 and your gross monthly income is $6,000, your DTI would be $2,000 / $6,000 x 100 = 33.33%

Step 1: Sum up your total monthly debt payments, including:

• Credit card payments
• Personal loans
• Student loans
• Auto loans
• Existing mortgage payments (if applicable)
• Other debt obligations (e.g., alimony, child support)

Step 2: Divide this total by your gross monthly income (your income before taxes and other deductions).

Step 3: Multiply the result by 100 to get your DTI percentage.

Lenders use the DTI ratio to gauge how much additional debt you can handle and still comfortably meet your financial obligations. A low DTI ratio generally indicates healthier personal finances, as it suggests that a smaller portion of income is allocated towards debt payments.

Maximum DTI ratios different types of home loans

The maximum debt-to-income ratio for a mortgage can vary depending on the lender and the type of loan you're applying for. Generally, lenders prefer a DTI ratio that does not exceed 43% of your monthly income because it indicates that you have a good balance between debt and income, making you a less risky borrower. 

However, some loan programs, like those backed by the Federal Housing Administration (FHA), may allow DTI ratios higher than 43%, sometimes up to 50% or slightly more, especially if you have compensating factors such as a high credit score or substantial savings.

• Conventional loans: Typically require a DTI ratio of 43% to 45%. Lenders might allow higher ratios, up to 50% for applicants with good credit history or substantial cash reserves.
• FHA loans: Offer more flexibility with DTI ratios, allowing up to 50%. These loans are designed to accommodate borrowers with minimum credit scores of 580, providing a pathway to homeownership with more lenient eligibility requirements.
• VA loans: Do not specify a maximum DTI ratio, though borrowers with higher DTIs may face additional scrutiny. Some lenders are open to ratios as high as 60%, particularly for veterans and surviving spouses, reflecting the program's accommodating stance.
• USDA loans: Designed for home buyers in eligible rural areas, these loans permit DTI ratios of up to 46%. Applicants must also meet household income limits, not exceeding 115% of the median income for their area.

How to get a loan with a high debt-to-income ratio

A high debt-to-income ratio can result in a turned-down mortgage application. Luckily, there are ways to get approved even with high debt levels.

1. Try a more forgiving home loan program

Different programs come with varying DTI limits. For example, Fannie Mae sets its maximum DTI at 36% for those with smaller down payments and lower credit scores. Often, the limit for those with higher down payments or credit scores is 45%.

Government-backed loan programs, like FHA loans, allow a debt-to-income ratio of up to 50% 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 in highly populated employment centers.

Perhaps the most lenient of all are VA loans, which are zero-down financing reserved for current and former military service members. If you have enough residual income, the DTI for these loans can be quite high. If you're fortunate enough to be eligible, a VA loan is likely the best option for high-debt borrowers.

2. Explore high-DTI mortgage lenders

When conventional lenders turn you down due to a high DTI, consider alternative financing sources. Credit unions, online lenders, and community banks often have more flexible criteria than large traditional banks. 

They may look beyond just your DTI, considering your overall financial picture. Some online lenders use innovative methods to evaluate borrowers, which could work in your favor if you have strengths in areas other than DTI. While these options may be more accommodating to high-DTI situations, be prepared for potentially higher interest rates or fees.

3. Consider a rent-to-own or lease option agreement

If your high DTI is preventing you from qualifying for a traditional mortgage, a rent-to-own or lease option agreement could be a viable strategy. This approach allows you to rent a home with the option to buy it later, giving you time to improve your DTI before applying for a mortgage. Part of your rent typically goes towards the future down payment, helping you build equity while you work on strengthening your financial position.

4. Explore seller financing opportunities

Another strategy for high-DTI borrowers is to seek out properties with seller financing options. In this arrangement, the property seller acts as the lender, which can offer more flexibility than traditional mortgage lending. Seller financing often allows for negotiable terms that can accommodate a higher DTI, such as adjustable interest rates, flexible repayment schedules, or even balloon payments. This option can be particularly effective when you find a motivated seller or a property that might not qualify for conventional financing.

5. Lower your loan amount

Sometimes, simply adjusting the loan amount you're applying for can improve your DTI ratio by reducing how much of your income is viewed as committed to debt each month. It’s like choosing a less expensive item to keep your budget in check.

You can bring your debt-to-income ratio (DTI) within acceptable limits by opting to buy a less expensive home and, therefore, a smaller mortgage. This might involve revisiting your housing needs and budget to find a balance that works for both you and potential lenders.

6. Consider a larger down payment

Making a larger down payment can be an effective strategy for borrowers with a high debt-to-income ratio. By putting more money down upfront, you reduce the overall loan amount you need to borrow. 

This, in turn, leads to lower monthly mortgage payments. Since your DTI calculation includes your monthly debt payments, reducing your mortgage payment effectively lowers your DTI. 

Additionally, a larger down payment decreases your loan-to-value ratio, which can make you a more attractive borrower to lenders, potentially offsetting some of the risk associated with your high DTI. While this approach requires more upfront capital, it can significantly improve your chances of loan approval and might even result in better loan terms.

7. Buy down your mortgage rate with discount points

One way to reduce your debt-to-income ratio is to drop the payment on your new mortgage. You can do this by "buying down" the rate by 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.

8. Consider adding a co-borrower

Involving a spouse or partner in your loan application can be advantageous. If your partner has a lower DTI, their financial profile can help reduce the overall DTI for the household. This strategy is particularly useful for couples seeking high debt-to-income ratio mortgage solutions. However, if your partner's DTI is similar to or higher than yours, their inclusion might not be beneficial.

9. Opt for a co-signer

For those aiming to secure a mortgage with a high DTI, enlisting a co-signer, like a family member or a close friend, can be a viable option. 

A co-signer’s financial stability and debt-to-income ratio are considered by lenders, which can enhance your loan application. This could potentially lead to qualifying for a larger mortgage or obtaining more favorable terms, such as lower interest rates. It's important to note that a co-signer doesn’t need to reside on the property but must agree to fulfill the loan obligations if you are unable to do so.

10. Cash-out refinancing

If you’re a homeowner 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.

Mortgage loans for high-debt-to-income borrowers

If you're struggling with a high debt-to-income ratio, there are still loan options available. Some lenders offer high-debt-to-income-ratio loans designed specifically for borrowers in your situation. Here are some alternatives to consider:

Non-qualified mortgage (Non-QM) loans

Non-qualified mortgage loans offer an alternative for borrowers with high debt-to-income ratios who struggle to meet traditional mortgage requirements. These types of loans don't follow the strict guidelines set by Fannie Mae and Freddie Mac, allowing for more flexibility in underwriting.

Non-QM loans can accommodate higher DTI ratios and may offer alternative income verification methods, benefiting self-employed individuals or those with irregular income. However, this flexibility typically comes with higher interest rates and potentially larger down payments.

While non-QM loans can provide a path to homeownership for high-DTI borrowers, be prepared for potentially higher interest rates and stricter down payment requirements.

Portfolio loans

Portfolio loans can be another option for high-DTI borrowers. Unlike conventional mortgages, portfolio lenders keep these loans on their own books instead of selling them to government-sponsored entities. This gives them more control over lending criteria, potentially allowing for higher DTI ratios than conventional loans. 

Portfolio lenders often take a more holistic approach, considering factors like credit score, savings, and employment history alongside DTI. While this flexibility can be beneficial, these loans may come with higher interest rates to offset the lender's increased risk. Always compare terms and total costs with other options before committing.

FHA loans for higher DTI

FHA loans are known for being more lenient with credit and DTI requirements. With a good credit score (580 or higher), you might qualify for an FHA loan with a DTI ratio of up to 50%. This makes FHA loans a popular choice for borrowers with good credit but high debt-to-income ratios.

VA loans for veterans with higher DTI

If you're a veteran or active-duty service member, VA loans can be an excellent option. The VA doesn't set a maximum DTI, though most lenders prefer a DTI of 41% or lower. However, with strong compensating factors, you might qualify with a higher DTI.

Hard money loans

While typically used for investment properties, hard money loans focus more on the property's value than the borrower's DTI. However, these loans often come with higher interest rates and shorter terms. They're usually considered a short-term solution, with borrowers planning to refinance or sell the property within a few years.

Peer-to-peer lending

While less common than traditional mortgages, peer-to-peer mortgage lending platforms are emerging as an alternative for high-DTI borrowers. These online platforms connect borrowers directly with individual investors willing to fund mortgage loans. 

Some peer-to-peer mortgage lenders may be more flexible with DTI requirements, considering factors beyond just credit scores and income. They might evaluate your overall financial picture, future earning potential, or the property's value. However, be prepared for potentially higher interest rates and fees compared to traditional mortgages, reflecting the increased risk for investors.

6 tips to lower high debt-to-income ratios

If you're finding it challenging to get a loan with a high debt-to-income ratio, consider these strategies to lower your debts.

1. Increase your income

Boosting your income is a practical approach to lowering your DTI ratio. Consider exploring opportunities like a side hustle, 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.

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 period of time. You may be able to pay off high-interest credit cards with a personal loan at a lower interest rate and payment. Or, refinance your car loan to a longer term, a lower rate, or both.

Transferring your credit card balances to a new one with a 0% 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 30 to 60 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 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:

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.

4. Postpone major purchases

If possible, delay major purchases that would add to your debt load. This includes things like new car loans or financing large appliances or furniture.

5. Consider downsizing or reducing living expenses

If you're renting, consider moving to a less expensive place to free up more of your income. Look for ways to reduce other living expenses, such as cutting unnecessary subscriptions or negotiating better rates for services.

6. Negotiate with creditors and explore debt relief options

If your monthly debt payments are stretching your budget thin, consider reaching out to your creditors. Many are willing to negotiate lower interest rates or extended repayment terms, which can significantly reduce your monthly obligations and improve your DTI. For those feeling overwhelmed by their financial situation, debt relief programs offer another avenue. These programs can help you negotiate with creditors and potentially reduce your overall debt load, providing a path to a healthier financial future.

FAQ: How to get a loan with a high DTI ratio

Check your eligibility for a high debt-to-income mortgage

A high debt-to-income ratio can make it tougher to get a home loan. Fortunately, lenders have some flexibility when it comes to mortgage requirements.

If your DTI is high but you're a reliable borrower in other respects, there's a good chance you could still qualify. To find out, talk to a local lender and check your eligibility today.