5 steps to improve your HELOC debt-to-income ratio

Are you considering applying for a home equity line of credit (HELOC) to tap your home’s equity?

Before applying, assess whether your debt-to-income ratio for a home equity loan meets lenders’ qualification standards.

Lenders scrutinize your debt-to-income ratio (DTI) to determine if you can afford a HELOC’s monthly payments while keeping up with existing debts. Exceed the limit, and your approval chances will sink.

So, if you want to secure a home equity loan with a high debt-to-income ratio, there are a few steps to consider before applying.

What HELOC debt-to-income ratio do lenders want?

Qualifying for a HELOC requires a certain DTI range. Lenders calculate it by dividing your total recurring debts by your pretax earnings.

Many lenders usually cap the debt-to-income ratio for HELOC qualification at around 43%. But the lower your ratio, the better your chances. A DTI above 50% often leads to denials.

Aside from the debt-to-income ratio for home equity loan requirements, HELOC approval also depends on your credit score, amount of home equity, and your income stability.

FICO scores of 680+ are recommended for the best rates, along with at least 15-20% of home equity.

The easiest way to calculate your debt to income for HELOC

Figuring your exact DTI takes a bit of math, but you can easily estimate it in seconds using an online DTI calculator.

These tools guide you through inputting your monthly debts and income, then automatically calculate and display the ratio.

You can also calculate your DTI yourself by:

• Adding up monthly debt payments like your mortgage, credit cards, student loans, car payments, child support, etc., but don’t include expenses like groceries or utilities
• Divide the total payments by your gross monthly household income before taxes

For example, if your monthly debts (mortgage, auto loan, and credit cards) total $2,000, and you earn $5,000 a month, your DTI is 40% ($2,000/$5,000).

Why do lenders focus on your HELOC debt-to-income ratio?

Lenders analyze DTI ratios to estimate if borrowers can manage added debt from a HELOC.

Lower ratios minimize lender risk, so borrowers with lower DTIs have better approval odds because high ratios can indicate you already struggle to handle existing payments.

Taking on more debt through a home equity line further strains your budget. Lenders avoid lending in those high-risk situations to minimize defaults.

DTI also sheds light on how much wiggle room you have to absorb income disruptions. Lower ratios mean less financial stress if you lose a job or face surprise expenses.

Five ways to decrease your debt-to-income ratio for HELOC

If your DTI exceeds lenders’ limits, take steps to reduce the ratio before submitting a HELOC application. Consider these five proven methods to lower your ratio:

Pay down revolving balances

HELOC high debt-to-income ratios can result from heavy credit card debt. Shift focus to paying down those high-interest balances ahead of taking out more debt through a HELOC.

Start by listing all revolving accounts ordered by interest rate. Tackle the highest rate cards first using the debt avalanche repayment method, which is simply making the minimum payments on all debt and using any extra funds to pay off the debt with the highest interest rate

As you eliminate those accounts, your home equity loan debt-to-income ratio automatically drops. This also helps credit scores by lowering your credit utilization ratio.

Refinance existing loans

See if you can lower monthly payments by refinancing loans for your home, auto, student debt, etc.

Refinancing to a lower rate reduces the debts counted in your DTI. You may also benefit by extending repayment terms to drop monthly payments.

Lenders determine DTI based on minimum required payments, so reducing those required amounts helps lower your ratio.

Consolidate debt into a lower payment

Combine multiple higher-interest debts into a single debt through a consolidation loan or balance transfer card. This folds several payments into one lower monthly payment.

You can get fixed rates as low as 8% to 10% for debt consolidation loans at credit unions or online lenders—which can be a significant savings against credit card interest. Compare options to find the best terms and rates for your situation.

Increase income

Boost your income to balance higher debts. Taking on side gigs, monetizing hobbies, or renting out space can expand your earnings.

Increasing gross monthly income by just $500 can substantially improve your debt-to-income ratio for HELOC if you maintain debt payments. And extra earnings help pay debts faster too.

Ask lenders to exclude specific debts

Some lenders may agree to disregard certain recurring payments in your DTI calculation, which lowers the ratio.

For example, they may exclude a car loan you’ll pay off within six months. Or credit cards you plan to pay with a HELOC. It can’t hurt to ask, so definitely try that out!

What other ways can you optimize for HELOC approval?

Along with minimizing your DTI, optimize other factors lenders weigh like credit scores, home equity, and payment history.

• Boost credit scores to above 680 by paying all your bills on time and correcting any reporting errors because higher scores suggest lower risk
• Build home equity to at least 20% by paying down your mortgage aggressively and avoiding cash-out refinances
• Maintain a perfect payment history; late payments, collections, and other derogatory marks negatively impact applications

Getting denied because of a high to DTI can be frustrating. But you now have a roadmap to touch up your ratio before reapplying.

For a refresher, pay down debts, increase earnings, lower payments, and boost credit to stack the odds in your favor.