Your debt-to-income ratio is a key financial measurement that lenders examine when you apply for a mortgage. If you own a home and want to refinance, you might think you don’t need to worry about your DTI ratio. After all, you’re already making your mortgage payments, right?
However, mortgage lenders still will look at your DTI ratio to make sure you can afford the payment after you refinance. If you have a high DTI ratio, there are some ways you can bring it down.
Understanding the DTI Ratio
Your DTI ratio is the percentage of your income required to pay your debts. The lower your monthly debt payments, and the higher your monthly income, the lower your DTI ratio will be.
DTI ratio measures your ability to afford new debt. If you have a high DTI ratio, it indicates that you’re already using a lot of your income to pay down debts, and you have less room in your budget to afford a new loan.
When you apply for a mortgage and submit your financial documents, lenders will consider both your front-end and back-end DTI ratios.
“Both front-end and back-end DTIs are important as they provide different perspectives on a borrower’s financial obligations,” says David A. Krebs, a mortgage broker based in Miami. “While front-end DTI focuses on housing costs, back-end DTI gives a more comprehensive picture by including all monthly debt payments. Lenders often give more weight to the back-end ratio, as it encapsulates a broader view of a borrower’s debt obligations.”
Front-end DTI ratio
The front-end DTI ratio considers only housing-related costs. It doesn’t include other debt payments, which means it will be lower than your back-end DTI ratio.
Lenders will look at your front-end DTI ratio to ensure the loan is affordable. For example, if you make $7,000 a month and apply for a home loan with a payment of $2,800 per month, you’d have a 40% front-end DTI ratio.
Most lenders don’t examine your front-end DTI ratio too closely. They care more about the back-end DTI ratio. However, some government loan programs — like Federal Housing Administration-backed mortgages — do use this ratio.
Back-end DTI ratio
Your back-end DTI ratio is a more complete picture of your finances because it considers all your debts — including car payments, student loans, and credit cards — as well as the monthly payment for your new loan.
Almost every lender will look at this ratio because it offers a clearer view of your monthly budget.
DTI ratio ranges explained
In general, the lower your DTI ratio, the more attractive you are as a borrower. A low DTI ratio means you have more room in your budget for debt payments, or to weather unexpected financial crises.
While there aren’t any ranges that are set in stone, you can use these as a quick reference for where you’re at financially:
- Less than 36%. DTI ratios in this range are good. At the lower end of this range, it means you have little debt. Even at the higher end, you’re able to afford your monthly payments easily, and you could probably make it through some unexpected expenses without major issues.
- 37% to 45%. 43% is a common maximum when you apply for a loan. In this range, you’re getting closer to the limit of what lenders are comfortable with, and you may have issues with affording your monthly payments — especially if you get an unexpected bill.
- 46% to 50%. At this level, you look risky to lenders. You’re spending nearly half of your pretax income on paying down debt, which means you’d struggle to afford new loan payments. It will be more difficult to find a lender, and you likely will pay a higher interest rate.
- More than 50%. A DTI ratio over 50% means you’re spending too much on paying debt. You’ll have very little luck finding willing lenders at this point. Also, almost every government-backed mortgage program doesn’t allow for DTI ratios this high.
Calculating Your DTI Ratio
If you know your monthly income and debt payments, calculating your DTI ratio is relatively simple. You can use a DTI ratio calculator or this formula:
(Total Monthly Debt Payments / Gross Monthly Income) x 100 = DTI Ratio
Lower monthly debt payments and higher income result in lower DTI ratios.
Back-End DTI Ratio Examples
|Monthly Debt Payments||Gross Monthly Income||DTI Ratio|
DTI Ratio Requirements for Refinancing
Conventional loans conform to requirements that allow lenders to sell them to Fannie Mae and Freddie Mac. The requirements include a maximum loan amount, a minimum credit score, limits on the home’s loan-to-value ratio, and maximum DTI ratios.
The standard maximum DTI ratio is 36%, but it can be increased based on certain factors. For example, borrowers with a credit score of 720 or higher can get a loan with a DTI ratio of 45% if the LTV ratio of the new mortgage is 75% or less.
FHA loans have low down payment and credit score requirements. They also offer some flexibility when it comes to DTI ratios. Lenders can set their own requirements, as long as they don’t approve loans for borrowers with a DTI ratio higher than 57%. Many lenders opt for a lower maximum.
If you already have an FHA loan, refinancing to another FHA loan can hold down costs.
Veterans Affairs-backed loans are available only to active-duty military members, veterans, and their surviving spouses. Borrowers can qualify with less-than-perfect credit and no down payment. However, lenders require a DTI ratio of 41% or lower.
U.S. Department of Agriculture loans have low minimum credit score and down payment requirements, but are available only to buy homes in rural areas. The maximum DTI ratio allowed for USDA loans is 41%.
If you already have a USDA loan, refinancing to another USDA loan can hold down costs.
DTI Ratio Requirements by Mortgage Type
|Loan Type||DTI Ratio Maximum|
|Conventional||36%. Up to 50% with adequate credit, and reserve requirements.|
|FHA||Set by lender, no higher than 57%.|
Ways To Refinance With a High DTI Ratio
Having a high DTI ratio can make it difficult to refinance a mortgage.
“It’s definitely possible to refinance with a high DTI,” Krebs says. “But it may require some creativity. One option could be to seek out lenders who offer nontraditional refinancing programs, or who specialize in high DTI loans.”
However, there are some things you can do to refinance even with a high DTI ratio:
- Reduce your DTI ratio. This is the obvious option, though it’s easier said than done. Paying off or reducing your existing debts can lower your DTI ratio and help you qualify for a refinance.
- Refinance with an FHA loan. Lenders can offer FHA loans to borrowers with DTI ratios of 50% or more. However, not every lender will do this, so you’ll need to shop around and compare mortgage offers to find one that will.
- Work with your current lender. If you’re handling your mortgage payments without issue, and refinancing won’t increase your monthly payment, ask your current lender about refinancing. You may be able to work something out.
- Work with a mortgage broker. Mortgage brokers match people with lenders. If you work with a broker, they can help you find a lender that’s willing to refinance your mortgage.
- Nonqualified mortgages. Qualified mortgages meet requirements designed to protect consumers. Some lenders offer nonqualified mortgages, which may include riskier features such as balloon payments or high fees. These loans are exempt from DTI ratio requirements, making them a way to refinance if you have a high DTI ratio. Read the fine print to be sure you understand the risks and cost to refinance a mortgage.
How To Reduce Your DTI Ratio
If you want to refinance your mortgage, reducing your DTI ratio can help. To help lower your DTI ratio, use these tips:
- Pay off existing debt. When you pay off a loan, you remove a monthly debt payment from your budget, which will lower your DTI ratio. If you have a loan with a low balance, you can focus on paying it off to get a quick improvement in your DTI ratio.
- Boost your income. Earning more money can improve your DTI ratio, whether it’s from getting a raise, working overtime, or getting a side hustle.
- Avoid new debt. Avoid applying for new loans or credit cards before refinancing. This will help you keep your DTI ratio low and avoid the negative effect that new loan applications have on your credit score.
- Ask your lenders for a lower interest rate. If you can negotiate a lower rate on your debts, you’ll have lower monthly payments and your DTI ratio will drop.
FAQ: How To Refinance With a High DTI Ratio
Here are answers to some common questions about refinancing your mortgage with a high DTI ratio.
The highest DTI ratio you can have when refinancing to a qualified loan is 57% with an FHA loan — but finding a lender may be difficult. A DTI ratio between 41% and 50% is a better target to aim for.
Your DTI ratio compares your monthly income and debt payments. Eliminating a debt payment or boosting your income will improve the ratio. If you boost your income, you’ll be able to prove that as soon as you get your next paycheck. If you pay off a debt, you may have to wait as long as a month or two for the lender to update the credit reporting bureaus.
Once you get a loan, your lender won’t penalize you if your DTI ratio increases. However, a high DTI ratio will make it difficult to get a new loan or to refinance.
The Bottom Line on Refinancing a Mortgage With a High DTI Ratio
If you have a high DTI ratio, refinancing your mortgage may be difficult, and you might not qualify for the best interest rates. Do your best to reduce your DTI ratio by improving your income or reducing your debts. If you still have a high DTI ratio, use these tips to find a lender and get the best deal possible on your mortgage refinance.
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