Need to improve your debt-to-income ratio? As one of the main metrics evaluated by lenders for a mortgage, a lot of people can benefit from taking action to improve this particular number. Let’s look at the three options you have to lower the ratio and get you approved for that mortgage you deserve.
Lower Debt-to-Income Ratio by Paying Off Debt
The first thing you can do to lower your ratio is by paying off debt. This is a great option if you have assets you can sell, such as stocks, bonds, or cash sitting in the bank.
The reason this lowers your ratio is it decreases the top number. So for example, let’s say you currently have $2,300 in monthly debt payments and a gross income of $5,000.
$2,300/$5,000 =0.46, which is generally too high to get a mortgage.
The good news is you have some cash sitting aside that you can use to lower the monthly debt. Maybe there’s a credit card you can pay off, or a student loan. That brings the number down to $2,000 a month.
$2,000/$5,000 = $0.40, which is usually acceptable to mortgage lenders. Your ratio shows them you aren’t spending too much money on debts and should be able to regularly pay them back.
You have another option to improve your ratio, and that’s increasing the size of the bottom number – your income.
Improve Debt-to-Income Ratio by Earning More Money
Some people consider this one harder to do. But depending on the type of business you’re in, it may be a better option for you. For example, someone based on commissions may be able to put in more hours and earn more commissions to boost their income. Or a freelancer can put in extra time to get extra jobs.
Let’s say we start with the same numbers as above. You make $5,000 a month and your debts come out to $2,300. So
$2,300/$5,000 = 0.46 – not great.
To improve your ration, you decide to start working a bit harder at your sales job and making extra money. You’re able to get your monthly income up to $6,000 a month, so let’s see how that affects your ratio.
$2,300/$6,000 = 0.38 – much better. This is well-within the limits for most lenders.
There is a third option, and it’s arguably the best way to go.
Get a Better Debt-to-Income Ratio by Earning More and Paying Off Debt
What if you’re able to both increase income and pay off debt?
The original ratio was $2,300/$5,000 = 0.46. But if you lower your debt payments by $300 a month and increase income by $1,000 a month, you get dramatic results.
$2,000/$6,000 = 0.33 – a ratio attractive enough to most lenders to get great rates.
Do you have any other questions about your debt-to-income ratio or the mortgage process? Shoot us an email at Team@RyanGrantTeam.com or call us at (949)–651-6300. We look forward to hearing from you.