How to get a loan with a high debt-to-income ratio
The debt-to-income (DTI) ratio is a measure that compares monthly debt payments to gross monthly income.
In short, it indicates how much of your income is consumed by debts like credit cards, student loans, auto loans, and mortgage payments.
When reviewing loan applications, lenders closely scrutinize DTI. They want to confirm you aren’t taking on excessive debts relative to your income.
While definitions vary slightly by lender, here are general DTI recommendations:
- 36% or below is considered ideal
- Up to 43% may be acceptable for borrowers with excellent credit
- Over 50% makes approval very unlikely
If your DTI exceeds 43%, you may have a harder time securing a loan, but it's not impossible and can be accomplished.
Keep reading to learn how to strengthen your chances of financing approval even with a high DTI.
Why lenders care about your debt-to-income ratio
Your DTI gives lenders insight into how comfortably you can manage additional debt.
In general, you want to aim for a lower DTI percentage when applying for loans.
To lenders, a lower ratio indicates that more of your income remains after covering existing debts, leaving additional funds available to repay new loans comfortably. It also signals to them that you handle money responsibly and prioritize payments on your obligations.
Conversely, a high DTI percentage tells lenders that much of your income is already consumed by debt repayments, leaving you little wiggle room to take on additional credit and loans.
From a lender's perspective, the lower your DTI, the lower their risk of payment delays or defaults if they approve your loan application.
Programs like FHA loans allow DTIs up to 50% because they receive government backing that offsets the higher risk.
How to lower your debt-to-income ratio
If an initial loan denial cites a high DTI, don’t give up! It is still possible to get a personal loan with a high debt-to-income ratio.
Let’s find out how.
First, you can take steps to reduce the percentage before reapplying, strengthening your approval odds and terms.
Here are some practical ways to lower your debt-to-income ratio:
Pay off debts faster
Even small extra payments toward the principal of a loan or credit card balance speeds up the payoff timeline.
That’s because each extra dollar goes directly toward reducing your principal balance and, in turn, the amount of interest charged on the remaining balance. As a result, more of your regular payment can go toward principal reduction.
This snowball effect compounds month after month when you consistently make principal-only additions, even if they those extra amounts are only $25 or $50. Over time, those extras really add up and take years off your loan.
Increase your income
Earning more income through a promotion, raise, or side gig gives you larger gross monthly earnings. Your debt payments, even if they remain the same, become a smaller percentage of higher income, decreasing your DTI.
Look for overtime hours, freelance work, part-time employment, monetizing hobbies, or developing websites or apps to supplement your income while improving DTI.
Thankfully, there are tons of options available, thanks to the gig economy. Driving as an Uber, delivering groceries, and maybe even renting out a spare room are all viable side hustles.
Borrowers deserve their streaming binges and takeout Fridays sometimes. But when loans are on the line, small sacrifices now can pay off later.
Also, try to avoid taking on new consumer debt like credit cards or personal loans because minimum payments raise your DTI. A good tip is to make purchases with your debit card or cash.
Combining multiple debts into a single loan with lower monthly payments decreases your DTI. Debt consolidation loans allow you to roll several debts into one.
You can also consolidate through nonprofit credit counseling that negotiates lower interest rates on debts without requiring new loans. This is often more affordable than a high-interest consolidation loan geared toward borrowers with poor credit.
Thus, paying off debts faster, increasing your income, lowering expenses, and consolidating bills all help reduce your DTI to boost eligibility.
Alternative loans for high debt to income ratio
While getting a traditional bank loan or mortgage with a high DTI is unlikely, specialized programs provide more flexibility. Here are some options to explore for how to get a loan with high debt-to-income ratio.
- VA Loans - VA loans help military service members, veterans, and surviving spouses buy homes with no down payment required. They offer more lenient DTI standards, sometimes accepting ratios over 50%.
- FHA Loans - FHA loans insured by the Federal Housing Administration are designed for lower down payments and lower credit borrowers. They allow DTIs up to 50% in many cases.
- USDA Loans - For home purchases in designated rural areas, USDA loans from the U.S. Department of Agriculture are worth exploring for high-DTI buyers. They permit ratios up to 46%.
- Payday Loans - While payday loans have excessive fees and interest rates exceeding 40% APR in some states, they may approve loans more readily with minimal income and credit checks. Only use payday lenders as an absolute last resort.
Again, it can be difficult, but it’s not impossible to get approval for high debt-to-income ratio loans. Options exist for most situations, so be sure to do your research when looking into alternative loans.
Non-mortgage options to consider
If your DTI remains too high for secured installment loans or mortgages, less traditional options might be worth exploring as well. These rely heavily on credit. Having good credit but high debt-to-income ratio is something you can definitely work with.
Your credit is like a muscle - it gets stronger with regular workouts. Here are some tips to kick start that training montage soundtrack and get your score in shape:
- Authorized user status - Ask a family member with excellent credit to add you as an authorized user on a credit card or installment loan. Their account history boosts your credit mix and score.
- Credit builder loans - These loans place money into a savings account as collateral, and you make monthly payments. On-time repayments are reported to credit bureaus, gradually improving your score.
- Credit card secured bonds - Secured credit cards require an upfront security deposit that becomes your credit limit. Responsible use builds your credit history, score, and approval odds.
- Loan co-signers - Finding a cosigner with strong credit significantly improves your chances and loan terms. Just ensure you make timely payments so both parties avoid credit damage.
With a strategic approach, positive credit behaviors over time, and persistence, you can still get the financing you need.
Whether it’s through personal loans with high debt to income ratio exceptions or other options, there are many paths to explore. Just do your homework.