Next to your credit score, your debt-to-income ratio is the next most important thing that lenders look at when determining if you qualify for a mortgage. So what debt ratio do you need to qualify?
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Unfortunately, the answer will differ by lender. But ideally, you want a housing ratio of no more than 28% and a total debt ratio of no more than 36%. These are the conforming loan standards, which many consider the ‘gold standard’ in the industry.
What happens if you have a higher housing or total debt ratio? The good news is that there are likely still loan programs out there for you.
It’s a Ballpark Figure
The required debt-to-income ratios are really a ballpark figure. For example, if you had a 29% housing ratio and applied for a conventional loan, you may still get approved. The lender will look at the ‘big picture’ or all of your qualifying factors. If you have great credit and disposable income each month, they may let the 29% housing ratio slide.
The key is to make the rest of your qualifying factors as good as possible, especially if your debt ratio is higher than the program allows. The more positive factors you have to offset the negative, the better your chance of approval becomes.
The Debt-to-Income Ratios for Other Programs
If you don’t have the ‘ideal’ debt ratios of 28/36, you may have better luck with other mortgage programs that are available today including:
- FHA – The FHA allows much higher debt ratios of 31% for housing and 41% for your total debt ratio.
- VA – The VA doesn’t have a maximum housing ratio that they require. They do like your total debt ratio to be around 41% – 43%, though.
- USDA – The USDA allows a housing ratio of 29% and a total debt ratio of 41%.
As you can see, there are more flexible guidelines out there if you can’t meet the requirements of the conventional loan. In fact, the FHA, VA, and USDA have more lenient guidelines all the way around. Not only can you have higher debt ratios, but you can also have lower credit scores and put less money down on the home.
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Creating the Ideal Debt-to-Income Ratio
If you realize that your debt ratio is already high before you even apply for a mortgage, there are ways that you can help reduce it:
- Pay off some debts – If you can pay any of your debts off in full, do it. This will eliminate an entire payment from your debt ratio, which can help it.
- Pay some debts down – If you can’t afford to pay your debts off in full, consider at least paying them down so that the minimum payments decrease, which lowers your debt ratio.
- Get a second job – If you have the time for a part-time job, take one to help you have extra money. You can either use the money to pay your debts down or to increase your qualifying income for your mortgage.
- Start a side gig – If you can’t work a ‘formal’ part-time job, consider starting a side gig. You can do anything from sell crafts, do side jobs, or be a virtual assistant. You can then use the funds to pay down your debts. Since side gig money is hard to get through underwriting, your money is best used paying the debts down or off in full.
The ideal debt-to-income ratio is the one that works best for you. When it comes to qualifying for a mortgage, you’ll have to be in the ballpark of the program’s guidelines, as we stated above. If you find that you are just outside of a program’s guidelines, don’t give up. Just make sure you have maximized your other factors so that a lender won’t be too hard on your higher debt ratios and approve you for the loan.