How To Get A Better Mortgage Rate: Improve DTI (Debt to Income Ratio)

When buying a house, securing a mortgage is a big part of it. Getting all your ducks in a row is one key part to consider, especially if you want to score a good rate. One part of the process of securing a rate is your credit score and another is your debt-to-income ratio (DTI). Though many home buyers are concerned with their credit score, many are surprised to learn that their DTI counts against them much more. 

Below, we’ll dive deeper into DTI and how it’s calculated, as well as share some tips on how you can lower yours to be a more competitive applicant for mortgage lenders.

What Is DTI?

DTI takes your money salary into account and puts that up against your monthly expenses. In particular, it accounts for the debts that you have, including credit cards and other types of loans like personal or car loans. 

Normally, a lender wants your ratios below 43%, with 47% being one of the highest. The lower your ratio, the better, as it qualifies you for lower mortgage rates and better financing options altogether. 

How Is DTI Calculated?

The two numbers that matter when calculating DTI are your total debts and your gross monthly income. Taking those two numbers, DTI is the total debts payments you have divided by your total gross income for the month. Multiply that by 100 and you’ll have your percentage. 

There are many ways that this number can stray, as mainly debts from other loans and lenders are calculated. The only issue with that is that it fails to account for other key monthly expenses like food and necessities. While your lender may only look at one part, you too should calculate, not taking on a mortgage that you can’t afford. 

How To Lower your DTI

The lower your DTI, the better chance you have of getting a low mortgage rate. You’ll also qualify for more competitive financing options, able to get the best deal possible. If you’re concerned about your DTI and looking for ways to lower it, try out a few of these key strategies. 

1. Ditch the car loan

Purchasing a vehicle is another big purchase that hits your DTI ratio. Lenders will look at your car note and, if it’s a big number, they might be reluctant to fund you or hit you with a rate that’s higher than you were hoping. Before applying for a mortgage, it’s a good idea to pay it off car loans, reducing your DTI significantly. 

2. Pay off credit cards

Credit cards are great for building credit but, if you charge them up too high, they’ll increase your DTI. To reduce your ratio, it’s best to pay your cards off first, which will free you from debt and leave you with a lot more wiggle room to pay down a mortgage rate. Plus, when you pay down credit cards, you get an automatic boost to your credit score. 

3. Choose a co-borrower

If you take care of the first two, you should make a huge difference to your DTI. If you still need some help due to bad or limited credit, you could add a co-borrower to your application. That will boost your score and, if your co-borrower has good credit, score you at a much lower rate. Once you pay down your mortgage for a few years, you could qualify to refinance and get on your loan agreement alone. 

4. Include additional income

Depending on your lender, they may be able to add in additional income to lower your rate, especially if you’re living with someone. That could add the boost in income that you need to get a better rate overall and qualify you for better financing options.  

Lower your DTI

Taking steps to lower your DTI is key to getting approved for a mortgage loan. The lower your score, the better financing options you’ll have and the faster you can pay down your mortgage over time. Now that you know a few ways to reduce yours, get started today, getting your hands on low rates tomorrow to make your homeowner’s dreams come true.