Some clients have been turned down by other lenders for a high debt to income ratio, or DTI. This means their income is not high enough to support the loan payments and other monthly debt. Did you know that there are a few tricks to reduce high DTI?
First of all, not all lenders have the same DTI requirements. Some are more lenient, while some have their own very restrictive guidelines for conventional and even government backed FHA loans. Unless you know their guidelines, you could be turned down by one lender when you’d have an easy time qualifying with another lender. These additional restrictions are called overlays. If you have a complicated loan scenario, you’re much better off finding a broker who has access to lenders or loan programs with minimal or no overlays.
Already with a no overlay lender and still getting turned down?
Let’s say you’ve confirmed that overlays are not the problem. Your debt to income ratio is still too high. Is this a dead end, or is there something you can do?
In many cases, there are ways to adjust your debt to income ratio if you’re not too far over the limit. It all comes down to lowering your monthly payment as much as possible.
Get a gift.
Have family members offered to help contribute to your home purchase? Now might be the time to take them up on their offer of a gift. By putting down a higher down payment, you can lower your loan amount, which will lower your monthly payment and DTI.
On a refinance only, dispute your appraisal.
What does your appraisal have to do with your DTI? Your appraisal determines what percentage of the property value you’re borrowing. The lower the percentage, the lower your interest rate may be. In some cases there are large brackets where your interest rate won’t change. For example whether you’re borrowing 67% of property value or 79% of property value, you may get the same interest rate. It really depends on your particular loan scenario. However, if a small justified increase in the appraised value would push you into a better bracket, it could pay to ask for a reconsideration, assuming there are strong comparable sales that were overlooked in your appraisal.
Pay off debt.
Income is one half of the debt to income ratio. Monthly debt obligations are the other half. Any recurring DEBT payments such as installment loans and credit card minimums will be counted in your monthly debt, along with your new housing payment. If you can reduce your monthly debt, you may help yourself qualify for your loan. If you’re already in the middle of the loan process, always consult with your loan officer about which funds will be used to pay off debt, and how much you can afford to pay off. Do not pay off any accounts before asking these questions.
Cut other expenses.
Are there expenses associated with the home purchase that can be reduced, such as a homeowner’s insurance premium? Can another company offer a more competitive quote, or can you adjust coverage to obtain a more competitive quote? Are the annual property taxes accurate? These items affect your monthly housing payment, and therefore your monthly debt to income ratio.
Dip into your savings or retirement funds.
This method involves another way to reduce your loan amount. If you can put down a larger percentage of the purchase price, you will be borrowing less and reducing your monthly loan payments.
Buy down your interest rate.
A lower interest rate will also lower your monthly housing expense, and can save your loan from denial if you need a small reduction in your DTI.
Float down your interest rate.
If market conditions have improved AND you’re close to closing, depending on your lender’s policies, you may have an opportunity to lower your interest rate. Talk with your loan officer, since specific requirements must be met.
Find a new lender with a better interest rate.
Comparison shopping is always better to do before you go under contract on a home, since trying to pull this off mid-transaction can be very stressful and result in a lot of uncertainties. Just because a lender is advertising a rate, it doesn’t mean every person will qualify for that rate. Be sure to ask for a quote based on your specific loan scenario, with an accurate credit score, occupancy, loan amount, property type, property value, and even property location.
Find a new lender who views your income differently.
If you’re certain you’ve exhausted all options to get your current loan approved, it may be time to try another lender. If there is income that can’t be counted with one lender, a new underwriter may view things differently and calculate your DTI based on higher income.
Increase your overtime.
Overtime is one income type that will be averaged, and if you can increase you overtime and your earnings, you may be able to boost your income enough to qualify for a loan. Keep in mind this will only work if you have a solid history of earning overtime income from your job. Starting a new job, second job, or side business will not help without a history of earning that income.
Ask for a raise.
If you’re due for a salary increase, now would be a great time to ask your boss for a raise.
Find a cheaper house.
If all else fails and you just cannot lower your monthly housing payment enough to qualify, you may need to look for a less expensive house.
Find a co-signer.
Asking a family member to be a co-borrower on your loan is another option to help increase your income. This will only work if the family member also has a good credit score (ideally it will be equal to or higher than your own score), as well as good monthly income and low monthly expenses. If they already own a home with a mortgage payment and do not have a lot of excess money each month, it may not help the situation.
Renegotiate with the seller.
If you’ve done your home inspection and found some things that will need to be addressed later, renegotiating your purchase price may be an option to bring your monthly payment down. Even if you don’t find significant issues, the seller may be willing to work with you to get the deal to closing by renegotiating some aspects of your contract if you’re not able to solve this problem on your own. They could offer to pay some closing costs, which can include points to buy down your interest rate.
Use a combination of the options above.
You may need to try more than one of the options above to get your loan approved. Find out just how much of an improvement you need, then work with your loan officer to crunch some numbers to see what’s possible. It’s times like these that having an experienced loan officer is most helpful.