How to Lower Your Debt-to-Income Ratio for a Home Equity Loan

What is a Good Debt-to-Income Ratio?

Ideally, your debt-to-income ratio should be below 30%. However, many banks are willing to lend to customers with DTI’s as high as 40%. That said, if you want good terms and a favorable interest rate, the lower your DTI the better.

If your DTI is 50% or more, it’s highly unlikely that a lender will give you a loan and you’ll need to lower it before receiving financing.

How to Lower Your DTI

1. Stop Adding New Debt

If you’re in a hole, it’s a good sign you should stop digging. Lowering your DTI can be next to impossible if you’re constantly taking on new debts. To start moving in the right direction, reduce your credit utilization.

Granted, that’s easier said than done, given that over a third of Americans carry credit card debt month to month, according to a survey from Bankrate. So how can you stop adding debt and start lowering your DTI? Start with these steps:

Understand your credit cards’ billing cycle and interest rate:

Armed with this information, you’ll be able to make wiser decisions about using your credit card, and understand which debts should be prioritized. Because credit cards typically have some of the highest interest rates, paying that debt off first can be a smart move.

Document Your Expenses and Make a Budget

It can be hard to reel in your spending if you don’t know where it’s going. By documenting your money as it comes in and goes out, you’ll be able to identify areas that can be cut back on in a budget. When you do this, you’ll have less need to lean on credit cards each month.

Negotiate More-Favorable Terms With Your Lender

If you’re banking with a large national bank, it’s unlikely that they’ll do anything that really moves the needle for your DTI. However, if you’re a customer of a smaller local or regional bank, or a member of a credit union, you might be able to negotiate more favorable terms.

When asking for more favorable terms, understand that you’re a benefit to the lender. Reminding them how long you’ve been a customer or member can be helpful, as the cost of acquiring a new customer can be steep for these smaller, local lenders.

If you’re able to reduce your monthly payment, you can free up money that reduces your need for using credit and taking on debt. Removing new debts from the equation can lead to big results for your debt-to-income ratio.

It all starts with building the right financial habits, and that’s ultimately what will help you the most.

2. Understand Your Existing Debts

To lower your debt-to-income ratio, you need to examine your existing debts. Depending on how much debt you have, this step can cause some serious anxiety, but try to stay calm. While your debt could seem insurmountable at the moment, it’s an important step for forming a plan.

When you have a thorough understanding of your debts, it’s time to start chipping away at them. The ‘avalanche’ method is a debt repayment strategy that will reduce your DTI the fastest. What you’ll do is make the minimum payment on all debts, and make a larger payment on the debt with the highest interest rate. This strategically eliminates the debts that are costing you the most in relation to what you borrowed.

3. Consider Consolidating Your Debt

A debt-consolidation loan can be a massive help for lowering your debt-to-income ratio. By combining your various debts such as credit cards and personal loans, you can end up with a single payment that’s a better fit for your budget. This can have a positive impact on your DTI by reducing your credit utilization rate.

A debt consolidation loan could also potentially have a lower interest rate, but this will ultimately depend on factors like how much debt you have and your credit score.

Debt consolidation is great in some circumstances, but don’t rush into it without understanding the risks. Debt consolidation loans often have longer repayment terms. This means that even if you get a lower interest rate, you could end up paying more over time. Additionally, debt consolidation loans won’t change your spending habits. To reduce your DTI in the long run, the way you manage various lines of credit will have to change.

4. Get a Side Hustle

While it’s easy to focus on reducing debts to improve your debt-to-income ratio, there’s only so much progress you can make. To reduce your DTI even further, you’ll need to increase your income.

Getting a side hustle can help you do that, and it’s easier now than it’s ever been. While side hustles like driving for Uber or Lyft or doing food delivery are easy to get started with, don’t feel like they’re your only option. Some other side hustles that can be lucrative—and rewarding—include:

• Tutoring: If you’re a good teacher, becoming a tutor might be a great way to help students while improving your DTI.
• Dog-Walking: If you love our canine friends, you could make decent money walking dogs. Getting started with this side hustle can take a little more work if you’re doing it independently.
• Night-Shift Receptionist: A second or third-shift receptionist gig could be a good fit if you need a sidle hustle that’s typically low-stress and not as active as something like dog-walking.
• Bartending: If you’re looking for a role that’s social, bartending might be a good fit. Keep in mind that your earnings might vary depending on the days you work, and that regular scheduling might be a challenge in some establishments.

Additionally, with the internet’s help, you can turn almost any talent you have into income by creating online courses, selling products through platforms like Etsy, or freelancing other skills. If you’re not sure where to begin, start by creating a list of things you like to do and work from there!

5. Lower Your Debt-to-Income Ratio in Weeks with SKYDAN

Lowering your debt-to-income ratio takes time. If your debts have been slowly piling up over years, it can feel like you’ll never be able to get out from under them. Fortunately, you can, and you can even do it fairly quickly.

With SKYDAN’s Sale-Leaseback program, you can tap into the equity you’ve built in your home to pay off your debts and get your debt-to-income ratio under control. SKYDAN isn’t a bank or lender; we’re a real estate investment company. What does that mean for you? It means that we don’t even care about your DTI. If you have low credit or no credit, a high DTI, and no income, you can still qualify for SKYDAN’s program if you have enough equity in your home.

Ready to take the next step?