In a recent blog, we talked about how you can improve your credit score to access lower mortgage rates. But is there anything else you can do to enhance your risk profile as borrower? Actually, yes. You can simultaneously work on improving your debt-to-income (DTI) ratio.
What is Your DTI Ratio?
Your debt-to-income ratio is a percentage which expresses how your debts compare to your income.
To arrive at this number, your debts are added together, and then the total is divided by your income.
The higher the resulting number is, the higher your debts are in comparison to your income. The lower the number is, the lower your debts are in comparison to your income.
That means that you should aim to have as low a DTI ratio as possible.
How Can You Improve Your Debt-to-Income Ratio?
When it comes to lowering your DTI ratio, there are two aspects you can work on: your income and your debts. Between the two, tackling debts is probably easier, but you may find you have some flexibility in both areas if you get creative.
Following are some ideas for increasing your income:
- See if there is a way to make more money at your day job. This could entail requesting a raise, asking for more hours, moving to a different role, or obtaining a valuable certification. If you have a non-working spouse who will be signing on the loan with you, encourage your spouse to contribute to your income.
- Freelance. If you have any marketable skills which you can sell in a freelancing capacity, think about giving it a try. If you can achieve a consistent boost to your income in this manner, it may help you to improve your DTI ratio.
Following are some possibilities for decreasing your debts:
- Pay off high interest debts or consolidate them. If you have high-interest debts, it isn’t just the debts which are contributing to your DTI ratio. The interest on them is doing so as well, by continuously draining your money and making it harder to reduce your overall expenditures (or finish paying off those debts). If there is any way to pay any of them off, think about doing so. If not, see if you can consolidate them into a lower interest loan or move them to a credit card with a low introductory rate.
- Become more energy efficient. If you are not practicing energy efficiency habits in your day to day life, it might be the right time to start. When you use less hot water and stop using central HVAC when it isn’t necessary, you can save a surprising amount of money each month. You can put that toward paying off your debts.
- Buy generic products, used products, etc. How much money do you regularly spend on attire and basic household supplies? Shop for generic rather than brand-name items when possible and buy what you can at thrift stores instead of always shopping for items which are new. This will save you more money which you can put toward your debts.
- Learn to cook cost-effectively. If you regularly dine out, cut back on those expensive outings and opt to eat at home instead. Learn how to make soups, stews, and other inexpensive dinners. You might be surprised at how much this can add up to over time.
- Check to see if you can lower your utilities bills. Your cable company may regularly add or remove plans for your zip code without informing you. Some companies also have low-income packages available but may not mention them unless you ask about them.
- Cut the cable and unnecessary subscriptions. Are you paying for cable TV? It isn’t a great deal right now, when you consider the many streaming options which are available. Of course, it is easy to go overboard loading up on streaming subscriptions too. These add up over the course of a month, so think about cutting back on them at least temporarily. While you are at it, ask yourself if there are any other entertainment expenses you can go without.
If you can get your DTI ratio down low enough, it can at least partly offset a low credit score. That can help you qualify for the affordable mortgage rates you need to keep that ratio healthy in the future as you pay off your home loan.
We Can Help You Qualify for Competitive Mortgage Rates
If you need further advice on how to improve your credit score and DTI ratio, we would love to go over some ideas with you during your consultation.
But even if a low credit score and a high DTI ratio remain obstacles, we will work with you to help you find an affordable home loan in California. Please give us a call today at (925) 478-8630.