How to Adjust When Your DTI Ratio is Too High

High DTI Ratio can be Overcome

A high DTI ratio doesn’t mean you’ve got to hold off on purchasing your dream home.

A healthy balance of debt and income represents one of the keys to securing a VA home loan.

Debt-to-income ratio, or DTI ratio, is one of those crucial financial metrics for mortgage lenders. This is a ratio of your major monthly debts (student loan payments, car payments, mortgage payment) to your gross monthly income, and it’s something that both the VA and lenders take seriously. The VA wants borrowers to have a DTI ratio of 41 percent or less, although that’s not a make-or-break figure. Prospective VA borrowers with a DTI ratio above that level can often still secure financing by meeting additional requirements for residual income.

But not always.

Sometimes borrowers have a DTI ratio that’s just too steep to work with. Without enough money left over to cover everyday expenses, veterans will fall short of the residual income requirement and most likely strain to stay afloat financially. That’s obviously a huge red flag for VA-approved lenders. So what can you do if your DTI ratio is too high?

Cut Debt or Boost Income

One option is to look for a way to trim your debt or increase your monthly income. That’s easier said than done for most military borrowers. This approach might mean you put off a home purchase in order to pay down or pay off a car loan or a student loan. Pumping money into these kinds of revolving debts can help you lower your DTI ratio. But it’s a tactic that will take time, which means you might miss out on a home you like or lose out on lower interest rates.

Generating new sources of income can be equally tricky. Many families are already maxed out in terms of time, so tacking on a second job or trying to turn a hobby into an income stream can be difficult. You will also want to talk with your loan officer about the type of work because there are some specific requirements where employment is concerned.  Check out Veterans United guide on employment for an in depth look at these requirements.

The reality is neither of these is the most common approach. Veterans who are ready for homeownership but can’t quite get their DTI ratio under control can always take a different tack: Try a lower loan amount.

Lower Your Sights

Lenders calculate your DTI ratio based on the mortgage payment for your dream home. So if you’re wanting to obtain a 30-year fixed-rate mortgage for a $250,000 home at 4 percent interest, you’re talking about a $1,193/month payment without taxes and insurance. A loan specialist will run the numbers and see instantly that a $250,000 mortgage might be too much for your budget.

So try $225,000. Or $200,000. Or $185,000.

You can try different loan amounts and see how they would affect your DTI ratio. Of course, the tradeoff is you might not be able to purchase a home in the price range you planned. If that’s an unacceptable scenario, then start working to cut your debt or boost your income. But if you can live with slightly deflated purchasing power, playing with the numbers can get you where you want to be.

Use this simple form or call to a loan specialist at 855-870-8845 to get a look at your DTI ratio and learn about your own purchasing power.

Photo courtesy of dok1