Do you need a loan but have been refused everywhere? If you applied for a personal loan, or even a VA loan or FHA loan, only to be told that you don’t qualify because of your debt-to-income ratio, you need options.
Fortunately, you don’t have to have excellent credit. It is possible to have loan options with a high debt-to-income ratio. You just have to understand your situation and know where to look, whether it’s with a mortgage lender or other financial institution.
What Is a High Debt-To-Income Ratio?
A debt-to-income ratio, or DTI, is the relationship between how much you owe (existing debt) and how much you have coming in (gross income). You can calculate it by dividing your total monthly debt payment by your gross monthly income, defined as what you make before deductions.
Example: Imagine that you have multiple debts and owe $200 per month on student loans and $400 per month on your auto loan. Your monthly mortgage payment is $1,500, and your gross monthly income is $5,000. Your DTI is calculated as:
(1,500 + 200 + 400) / 5,000 = 0.42
Therefore, your DTI, in this case, is 42 percent.
“Is that high?”
A 42 percent debt-to-income will still give you options, but it is a bit high. Generally, mortgage lenders prefer to see a DTI below 36 percent. They want to know that you have money left over to pay off your mortgage loan after you’ve paid your existing bills like housing expenses, a student loan, or a car loan.
Here’s the typical breakdown:
- 0% to 35%: You’re managing your money well. Lenders will probably see you as a desirable borrower.
- 36% to 49%: You’re doing okay and might still be able to get a loan, but you might have to present additional proof that you can afford it before receiving loan approval.
- 50% or more: You may not have enough disposable income to afford a loan. Your borrowing options will probably be limited.
- borrowing options will probably be limited.
Fortunately, even if your DTI is on the high side, you’re not completely out of choices. Be it with a Federal Housing Administration-backed FHA loan, or other loan types, there are possibilities.
How To Get a Loan With High Debt to Income Ratio: 5 Loan Options
There are personal loan lender options for high debt-to-income ratio borrowers. It’s mostly a matter of finding one that suits your situation.
1. Debt Consolidation Loan
When your debt has driven your debt ratio through the proverbial roof and you have a mountain of debt payments, you want a loan that can help you get rid of it. You’ll need a successful debt repayment plan. Many lenders have personal loans designed to help you pay down debt obligations, and several accept a debt consolidation loan with high DTI.
Payoff is one highly-rated lender that helps borrowers eliminate credit card debt and increase their credit scores. You need to have three years of good credit, but you can have a DTI as high as 50 percent.
The downside is that you have to use a Payoff loan for your credit card payments. If you want a personal loan for other reasons, such as starting a small business, you’ll need to look for other high debt-to-income options.
2. Peer-to-Peer Loan
Personal loans used to always take place between a person and a company. Now, with the rise of the Internet and its ability to connect people, a borrower can get money directly from investors or funds through the peer-to-peer lending model.
Peer-to-peer loans are native to the digital world. One of the first, Prosper, is still leading the way and can be a good loan option for borrowers with high DTIs. As with Payoff, your DTI can be as high as 50 percent.
3. “Bad Credit Loans”
If you have poor credit on your credit report as well as a high debt-to-income, there’s options for a lender that offers what’s known as bad credit loans. One of these is Avant, a financial services group that accepts borrowers with credit scores as low as 580. This limit is lower than that of many other bad credit lenders.
You can also find bad credit loans through peer-to-peer lenders, also known as marketplace lenders. One promising option is Peerform, which requires a credit score of 600 and at least a full year of credit history.
4. Secured Personal Loans
The majority of personal loans on the market are unsecured loans, which means that you don’t have to put up collateral. But if your debt-to-income is too high or your credit score is too low to get unsecured loan options, you might be able to get a secured personal loan.
OneMain Financial offers a secured personal loan as well as unsecured loans. It frequently appears on lists created for borrowers with bad credit because it has no minimum credit score, credit history, or annual income. It also doesn’t specify a qualifying DTI.
One of the major benefits of OneMain Financial is that you can get money on the day you apply for a secured loan, but you usually do need to visit an in-person branch. Also, as with any secured loans, you could lose the collateral that you put up if you default.
5. Cosigned Loans
If you have trouble finding a lender to approve you on your own because of high debt-to-income, you might have a cosigned loan options. Be aware that many of these do have maximum combined debt-to-income ratios, a potential challenge depending on your cosigner’s DTI.
Lending Club, for example, welcomes a joint loan application so long as the applicants’ combined DTI is 35 percent or lower. One borrower can have a credit score of 540 or higher, provided that the co-signer has a score of at least 600.
If you make regular on-time monthly debt payments on your co-signed loans, your credit score and your co-signer’s will probably improve.
Your Home Equity – Possible High Debt-To-Income Alternative Options
You may choose to tap your home equity instead of the high debt-to-income ratio personal loan options. Doing so might let you consolidate debt while giving you a lower interest rate that you pay compared to a conventional loan. However, because your property is your collateral on any home loan, you could lose your home if you default.
In the past, if you wanted to tap your home equity but didn’t want a loan, you’d have to sell and move.
Through a sale-leaseback option, you can sell your home and stay in it regardless of your debt-to-income. Instead of moving, you sign a sale-leaseback agreement and can remain in place as a tenant. You keep paying rent until you’re ready to buy the home back or move.
It isn’t a loan, either, so it doesn’t hurt your credit score or drive up your DTI. And as long as you keep paying rent, you don’t face losing your home. You get the cash – and the peace of mind – without the risk.
High Debt-To-Income Options: Key Takeaways
When you’re in debt and dealing with the pressures of homeownership, it can take its toll. By working with a sale-leaseback program to convert your home equity without having to move, you can relieve yourself of both pressures.
Why spend another day stressing about your high debt-to-income ratio options? Talk to a financial advisor today to learn more.