If you have excessive debt but think you can still afford a mortgage, you may have to do a little legwork to find a willing lender. Each loan program has maximum debt ratio requirements, but that doesn’t mean lenders can’t be flexible. Keep reading to learn how to get the high DTI mortgage you need.
Start With Government Programs
If you have a high DTI (debt-to-income ratio) skip the conventional loan. You need low debt ratios and great credit for these loans. However, government loans, such as FHA, VA, and USDA loans offer more forgiving debt ratio guidelines.
Each government loan program requires the following DTI:
- FHA – 31% housing ratio and 41% total debt ratio
- USDA – 29% housing ratio and 41% total debt ratio
- VA – 41% total debt ratio
These ratios aren’t set in stone, though. Each loan program has a little flexibility. If you have other ‘good’ qualifying factors, such as a high credit score or significant assets on hand, a lender may be able to squeeze a slightly higher debt ratio through the cracks. Lenders can typically go up to 43% debt ratio. This means your total monthly debts don’t take up more than 43% of your gross monthly income (income before taxes).
Check Subprime or Alternative Lenders
Government loans do have eligibility guidelines. The easiest loan any borrower may be eligible for is the FHA loan. As long as you meet the guidelines, you qualify. USDA and VA loans, though, are for specific markets:
- USDA – Only low to moderate-income families buying a rural home qualify
- VA – Only veterans or active military members qualify (in some cases surviving spouses qualify too)
If you don’t fit into one of these categories and/or don’t qualify for an FHA loan, check out subprime lenders. Smaller lenders that don’t sell mortgages on the secondary market, but keep them on their books have more flexibility.
Since subprime or alternative lenders don’t have to follow any investor guidelines, they can set their own rules. This may include allowing higher than normal debt ratios. When you apply with these lenders, though, make sure you understand the terms. You may find they have higher interest rates, costs, or less friendly terms. Ask questions and negotiate to get the best deal.
Have Compensating Factors
Lenders look at the big picture when qualifying you for a loan. If a lender is willing to allow a higher debt ratio, they will want other factors that ‘make up for it.’ A few of the most common compensating factors are:
- High credit score – Your credit score shows a lender your level of financial responsibility. If you have a high DTI, but an exceptional credit score, a lender may trust that you can make your payments on time
- Assets on hand – Lenders like it when borrowers have liquid savings available. These liquid assets can cover your mortgage payment should you have a financial crisis, such as losing a job or falling ill.
- Stable income/employment – Lenders also like consistency and reliability. Staying at the same job for many years shows your investment in your job and your ability to remain stable. Changing jobs isn’t always a bad thing, but it does add a level of riskiness to a loan.
Lower Your DTI
You may have the option to lower your DTI too. It sounds complicated, but with a few steps, you may be able to knock a few percentage points off your DTI without much work. A few options include:
Pay your credit card balances down – Credit card balances bring your DTI up and lower your credit score. If you can afford to pay them down (or off), you benefit in two areas, increasing your chance of approval.
Pay your installment loans down – Installment loans with less than 10 payments carry less weight in your approval than those with more than 10 payments. If you can lower your balance down enough to get to that point, it can lower your DTI.
Refinance debts – You may be able to refinance certain debts, such as student loans to get a lower monthly payment. If you have a lot of credit card debt, consider consolidating it into one loan. The lower payment and less outstanding revolving debt can help you get approved.
Finding a mortgage when you have a high DTI may take a little more work, but it’s worth it. Start lowering your debt ratio at least 12 months before you apply for a loan. Take the necessary steps to pay balances down or consolidate debt. Once you’ve done what you can, shop for a lender within the loan program that your DTI fits or try subprime lenders for more flexible guidelines.