Mortgage lenders look at two things when deciding if you’ll qualify for a mortgage – your credit score and your debt ratio. Don’t make the mistake of assuming you are a shoo-in for a mortgage if you have a great credit score. If your debt ratio tells another story, you may find it harder to get a mortgage than you thought.
If your debt ratio is much higher than it should be for a loan program, you may want to consider employing the following tips to help eliminate your debt.
Pay Your Credit Cards off in Full
The best thing you can do is pay your credit cards in full. Any outstanding credit card debt that you have affects your debt ratio and your credit score. If you can swing paying it off in full, do it. If you can’t, pay the balances down as much as you can so that you have less than 30% of your total credit limits outstanding.
Your lender will use your minimum monthly payment to determine your debt ratio. You’ll want to get those credit card balances as low as you can to lower those required payments. It doesn’t matter if you pay more (you should) than the minimum payment; the lender strictly relies on what the credit report says, which will be the minimum payment.
Pay Loan Balances if You are Close to the End of the Loan
If you have installment loans that have less than 10 months of payments left, consider paying them off too. While lenders used to be able to ignore loans with less than 10 payments left, most lenders today have to include them. If the loan payment puts your DTI over the threshold, figure out if you can pay the loan off in full.
If you do pay your loans off, make sure you keep proof that they are paid in full. It could take some time for the credit bureaus to report the loan’s satisfaction. If you have proof from the lender of the loan being paid in full, your lender won’t include the debt in your debt ratio.
Apply for the Loan With Someone
If you are married or buying a home with someone you should consider applying for the mortgage together. This will only help you if your co-borrower doesn’t have a lot of debt too. The idea is to combine your income to reduce the debt-to-income ratio that you have on your own.
If you buy the home with someone that also has a lot of debt and not enough income to keep the DTI down, it may not work to your benefit. Each loan program has a different debt ratio requirement, but in general, you shouldn’t have a total debt ratio that exceeds 43% of your gross monthly income. If you are beyond that point even with a co-borrower, it may not be in your best interest to use the co-borrower. Instead, you may want to focus on paying your own debts down so that you can get the DTI low enough to get your approval.
Increase Your Income
You might think that increasing your income isn’t going to be easy. If you already work a full-time job, how could you possibly make more money? The first step should be to inquire about a raise at your full-time job. If it’s been a while since you’ve had a raise, it doesn’t hurt to ask. If that’s not an option, you can explore other opportunities.
Taking on a second job just to pay your debts down is a great way to eliminate debt. You won’t need the income to qualify for the mortgage, so you don’t have to worry about having the job for two years first. You just need it to help you get out of debt so that you can afford a new mortgage.
If a second job won’t work, consider starting a side hustle. If you have a skill, such as plumbing or HVAC repair, let friends and family know about it. If you are crafty and can make items to sell, do it. The internet offers numerous ways to sell your items without leaving your home. You can even find side hustles that you can do online, such as data entry or virtual assistants.
Again, using the money to pay off your debt, you’ll have an easier time qualifying for the mortgage.
Reducing debt for mortgage approval is often crucial to your ability to get a mortgage. Even if you can get approved, if you have a higher DTI, you may find that you don’t get the lowest interest rates or the best terms. Do what you can to get out of debt before you apply for a mortgage for the best results.Click to See the Latest Mortgage Rates»