How to get a Loan with a High Debt-to-Income Ratio

Is buying a house with a high debt to income ratio 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 mortgage. However, there are ways to make the numbers work, even with a higher DTI.

In this article (Skip to...)

• What is DTI?
• Max DTI eligibility
• DTI guidelines
• Qualifying for a loan with a high DTI
• Calculating DTI
• FAQ

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

Debt-to-income ratio (DTI) is a financial metric that compares a person’s total amount of debt payments to their gross monthly income.

Your debt-to-income ratio tells lenders how much money you spend relative to how much income you earn. Whether you’re a repeat or first-time home buyer, DTI helps determine how large a mortgage payment you can comfortably make.

You calculate DTI by dividing the total monthly debt obligations — such as mortgage payments, credit card payments, and loan installments — by the gross monthly income (your pre-tax income) and then multiplying the result by 100 to express it as a percentage.

• For example, if you make $5,000 per month before taxes and you owe $1,800 per month on student loans and minimum credit card payments, your DTI is 36% ($1,800 / $5,000 = 0.36).

A lower DTI ratio generally indicates healthier personal finances, as it suggests that a smaller portion of income is allocated towards debt payments.

Lenders want to be sure that prospective homeowners aren’t taking on more debt than they can manage before approving their mortgage loan application. When a borrower applies for a home loan, lenders consider two types of DTI.

Front-end DTI

Front-end DTI is limited to housing expenses and includes your potential monthly mortgage payment, homeowners insurance premiums, and property taxes.

Lenders often prioritize multiple factors in mortgage applications, with the front-end DTI receiving relatively less attention, except in specific cases like FHA loans. Nevertheless, your DTI serves as a useful gauge to assess your financial standing and determine a realistic affordability range for purchasing a home.

Back-end DTI

Back-end DTI is more commonly used during a home loan application because it provides an overall view of your monthly financial wellbeing.

Your back-end ratio looks at all of your recurring monthly minimum payments, including the front-end DTI plus any monthly debt from 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.

What’s the maximum DTI for a home loan?

Generally, a good debt-to-income ratio is around 36% or less and not higher than 43%. But each mortgage lender can set its own eligibility requirements and DTI guidelines.

Here are the common maximum DTI ratios for major loan programs:

• Conventional loans: 43% to 50%
• FHA loans: 45% to 50%
• VA loans: No max DTI specified, but borrowers with higher DTI could be subject to additional scrutiny
• USDA loans: 41% to 46%
• Jumbo loans: 43%

Most home loan programs can accept a pretty wide range of debt ratios. While lenders typically prefer a DTI on the lower end, they can often be flexible. If your DTI is closer to 50% than 43%, for example, other assets like a high credit score or a substantial down payment may help you qualify.

DTI Guidelines for Different Mortgage Loans

DTI ratio plays a significant role in mortgage qualification, with lower DTIs generally being more favorable. The specific DTI requirements, however, vary depending on the type of loan you get.

Conventional Loans

DTI requirements for conventional loans can vary based on individual circumstances and the loan type being sought. In general, a DTI of 50% or lower is often necessary to qualify. When DTI is high, lenders typically expect applicants to have substantial cash reserves to compensate for their debt burden and ensure loan security.

FHA Loans

FHA loans, which have the backing of the U.S. Federal Housing Administration, have more lenient eligibility requirements. To qualify, borrowers typically need a minimum credit score of 580, and the maximum allowable DTI is generally around 50%. It’s important to note that each lender has the discretion to establish their own DTI requirements, so it’s advisable to research and consult with potential lenders to understand their specific ranges.

VA Loans

For military personnel and surviving spouses, VA loans provide appealing options. DTI requirements for VA loans tend to be more lenient, with some lenders accepting DTIs of up to 60% in certain cases. However, individual lenders establish their own guidelines, so it’s crucial to communicate with them directly to determine their specific requirements.

USDA Loans

USDA loans are applicable only to eligible rural areas for home purchases and refinancing. The maximum DTI allowed for a USDA loan is 46%. Additionally, income limitations come into play, as households with earnings exceeding 115% of the median income for their area are ineligible. Lenders evaluating USDA loan eligibility consider the income of all household members, even if they are not listed on the loan. However, when assessing DTI, only the income and debts of those on the loan are considered.

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 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%.

FHA loans, on the other hand, allow a DTI 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. 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 period of time. 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, 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. 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 on a debt consolidation refinance, 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.

How to calculate your debt-to-income ratio

Lenders value low DTI, not high income. Your DTI compares your total monthly debt payments to your before-tax income.

Calculating your DTI ratio is done by adding your monthly debt obligations together and then dividing that figure by your gross monthly income.

DTI does not include monthly bills for basic household expenses like utilities, health insurance premiums, food, or entertainment.

Instead, your DTI ratio includes the type of debt from lines of credit or housing expenses such as monthly mortgage payments, homeowners insurance premiums, HOA fees, car loans, personal loans, student loans, and credit card debt.

Total monthly debt includes housing-related expenses such as

• Proposed monthly mortgage payment
• Property taxes and homeowner’s insurance
• HOA dues, if any

The lender will also add the minimum required payments toward other debt.

• Credit card debt
• Auto loans
• Student debt
• Debt consolidation loans
• Alimony and child support

When adding up debt, do not include the entire loan amount — just the monthly minimum payments.

Your monthly gross income is the total amount of pre-tax income you earn each month.

Formula for debt-to-income ratio

Divide your monthly payments by your gross monthly income, and then determine your DTI percentage by multiplying the resulting figure by 100.

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

For example, your income is $10,000 per month. Your mortgage, property taxes, and homeowners insurance is $2,000. Your car and credit card payments come to another $1,000. Your DTI is 30 percent.

Lenders don’t favor applicants who make more money. Instead, they approve those with a reasonable ratio of monthly debt compared to their income.

In the above examples, the applicant who makes the least is actually the most qualified for a loan.

Getting a loan with a high DTI ratio: FAQ

Check your mortgage eligibility

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.