7 Proven Ways to Lower Your Debt-to-Income Ratio
Your debt-to-income ratio can make or break your mortgage application. This single number tells lenders whether you can comfortably afford monthly mortgage payments on top of your existing debt obligations, and if your DTI is too high, you'll either be denied or offered less favorable terms.
The good news? Much like your credit score, your DTI can be improved with strategic financial moves. Here are seven proven methods to lower your debt-to-income ratio and position yourself for mortgage approval.
1. Pay Down Existing Debt
The most direct way to lower your DTI is to reduce your monthly debt obligations. Focus on high-interest debt first, as this approach saves you the most money on interest charges while freeing up monthly cash flow. The avalanche method (paying off highest interest rate debts first) is typically the most cost-effective strategy.
Alternatively, some people prefer the snowball method, which focuses on paying off the smallest balances first to build momentum and motivation. While this may cost slightly more in interest, the psychological wins can help you stay committed to debt reduction.
Even small reductions make a difference. Paying off a $200 monthly debt when you earn $5,000 per month lowers your DTI by 4 percentage points. If you're sitting at 47% DTI, that single change could bring you into acceptable range for many lenders.
2. Increase Your Income
Raising your income lowers your DTI without requiring you to pay off debt. If you're due for a performance review, prepare your case for a raise by documenting your accomplishments and researching market rates for your position. Even a 5-10% salary increase can significantly impact your DTI.
Side hustles and freelance work can also boost your income, but there's an important caveat for mortgage applications: lenders typically require a two-year history of secondary income before they'll count it toward your qualifying income. If you're planning to buy soon, a side hustle might not help your DTI calculation for this purchase, but it can provide extra cash to pay down debt.
Make sure you're including all eligible income sources when calculating your DTI. This might include consistent bonuses, commission income, rental property income, child support or alimony received, or military allowances. Many first-time buyers underestimate their qualifying income because they forget to include these sources.
3. Avoid Taking on New Debt
In the 6-12 months before you plan to apply for a mortgage, resist the temptation to take on new debt. Every new monthly payment increases your DTI and reduces your borrowing capacity. This means holding off on financing furniture for your future home, avoiding new credit cards, and delaying that car purchase if at all possible.
Opening new credit accounts serves a double blow: it increases your DTI through new monthly payments and temporarily lowers your credit score through the hard inquiry and reduced average age of accounts. Both factors can hurt your mortgage application.
If you absolutely need to make a large purchase, save up and pay cash rather than financing. Your future self will thank you when you're moving into your new home instead of waiting another year because of a higher DTI.
4. Consolidate or Refinance High-Interest Debt
Debt consolidation can lower your DTI if it reduces your total monthly payments, though you need to approach this strategy carefully. Consolidating multiple credit card payments into a single personal loan with a lower monthly payment can improve your DTI calculation.
However, exercise caution: don't extend your loan terms so significantly that you end up paying far more in interest over time. A consolidation that reduces your payment from $500 to $300 per month might seem attractive, but if it extends your payoff timeline from 3 years to 7 years, you could pay thousands more in interest.
Also consider the impact on your credit score. Debt consolidation often involves closing old credit accounts or opening new ones, both of which can temporarily affect your score. If you're close to applying for a mortgage, the timing of consolidation matters. Ideally, consolidate at least 6-12 months before your planned mortgage application to allow your credit score to recover.
5. Consider a Larger Down Payment
A larger down payment lowers your DTI by reducing your monthly mortgage payment. If you're planning a 5% down payment but could stretch to 10% or 15%, the lower loan amount means lower monthly principal and interest payments, which directly improves your DTI calculation.
Additionally, putting down 20% or more eliminates the need for private mortgage insurance (PMI), which further reduces your monthly housing costs and improves your DTI. PMI typically costs between 0.5% and 1% of the loan amount annually, which translates to significant monthly savings.
If you don't have enough saved for a larger down payment, consider asking for gift funds from family members. Most loan programs allow down payment gifts from relatives, and these funds can help you put more down, lower your loan amount, and improve your DTI. Just be sure to follow your lender's documentation requirements for gift funds.
6. Remove Yourself from Co-Signed Loans (if possible)
Co-signed loans appear on your credit report and count toward your DTI, even if you're not making the payments. If you co-signed for a family member's car loan or a child's student loan, that monthly payment is included in your DTI calculation until the loan is paid off or you're removed as a co-signer.
Removing yourself from a co-signed loan can be challenging but not impossible. Some lenders allow co-signer release after the primary borrower makes a certain number of on-time payments (often 12-24 months) and meets creditworthiness requirements. Contact the lender to understand their co-signer release policy and requirements.
If removal isn't possible, you might need to wait until the co-signed loan is paid off before applying for your mortgage, or accept that this debt will limit your borrowing capacity. This is why financial advisors often caution against co-signing loans—it can significantly impact your own borrowing ability.
7. Wait for Debts to Be Paid Off
If you're close to paying off a loan—particularly one with 10 months or less remaining—it might make sense to wait before applying for a mortgage. Lenders sometimes exclude debts from your DTI calculation if they'll be paid off within 10 months, though policies vary by lender.
Strategically timing your mortgage application can make a meaningful difference. If your car will be paid off in 8 months and that payment represents 10% of your DTI, waiting those 8 months could move you from a 46% DTI to a 36% DTI, dramatically improving your approval odds and interest rate.
Student loans deserve special attention. If you're aggressively paying down student debt, running the numbers to see how much your DTI improves as you pay down the balance can help you identify your optimal timeline for mortgage application. Some borrowers benefit from making extra payments for 6-12 months to substantially reduce their student loan payment before applying for a mortgage.
