Your debt-to-income ratio (DTI) is one of the main factors traditional lenders take into account when deciding whether you qualify for a loan. The reasoning is pretty simple: if your current income status makes existing debt difficult to pay off, lenders will refuse to lend you more money since you will probably be unable to pay it back on time. Having a poor DTI can severely limit your options when it comes to accessing new lines of credit for major life purchases such as a home, car, student loan, or credit card.
What is an Ideal DTI?
DTI is expressed as a percentage — the lower the percentage, the better chance you have to access loans and lines of credit. A low percentage indicates that you are able to manage your debt easily and consistently pay what you owe on time. Traditional lending institutions see a high DTI and think well if they can’t pay what they already owe, they won’t pay us either.
That all being said, an ideal DTI would be 36% or below for a mortgage, although some lenders will go up to 43%. Keep in mind that there are many factors at play when applying for a loan; there’s a chance that if one factor suffers slightly, you may still qualify if the rest are stellar.
Unfortunately, there are only two ways to truly decrease your debt-to-income ratio:
- Decrease your monthly recurring debts
- Increase income
Ways to Acquire Loans With a High DTI
There are a few ways, even if they are a bit time consuming or risky, to acquire a loan with a high debt-to-income ratio:
- Debt consolidation loans. A debt consolidation loan is when you take out a new loan to pay off multiple existing unsecured loans at once. Debt consolidation loans allow you to bundle your loans and pay them off simultaneously at a lower interest rate, making monthly payments more manageable. However, these loans generally require a good credit history, so if you’ve had prolonged financial troubles, you may not qualify.
- Bad credit loans. Bad credit loans are personal loans that are available to those with a credit score lower than 630. We must warn that these loans are less than desirable and can be inherently predatory. Lenders who see you as a risk will charge much higher interest rates to protect themselves. In this way, they are similar to the infamous payday loan. If you pursue a bad credit loan, ensure it is an installment loan (not a payday one) with a reputable lender that offers flexible payment periods.
Don’t get discouraged by financial bleakness. Debt doesn’t have to be an endless cycle rolled up in loans and interest rates that you will be paying off for years. There are alternatives to traditional loans that are designed to help you climb out of debt and set you up for future financial stability.
SKYDAN Equity Partners: An Alternative to Traditional Loans
SKYDAN’s home buyback program is designed to help homeowners absolve existing debts, improve credit score, and improve overall financial health. Here’s how it works: we buy your home and in return give you a large sum of cash, with which you may pay off existing debts. You then lease the home back from us for up to 24 months with deferred rent payments. This means that while you’re leasing your home back from us, there are no monthly payments, no interest paid, and no added debt.
At the end of the 24-month period, you have two options:
- Purchase the home back (original price + deferred rent)
OR - Sell the property, keeping all additional equity
We don’t care about your credit score, employment history or debt-to-income ratio. We are here to help you break the cycle of debt, not add to it like traditional home loans do. Our home buyback program is an attractive option for tax lien relief. The only thing you need in order to qualify is having enough equity in your home.