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16 Ways to Improve Your Debt-to-Income (DTI) Ratio

By Veronica Nguyen · Nov 29, 2014 · Mortgage

16 Ways to Improve Your Debt-to-Income (DTI) Ratio

Image courtesy of TaxCredits.net, TaxCredits.net

Your DTI is used by mortgage lenders to determine whether you qualify for a loan, and if so, for how much. Improve your DTI with these 16 tips.

If you've come across this article you already know that your debt-to-income (DTI) ratio is an important metric lenders use to determine whether you qualify for a mortgage. In this article we'll show you how to improve your DTI in order to increase your chances of getting a mortgage, or simply to get better mortgage terms.

What Is DTI: A Quick Explanation

DTI is your monthly debt payments divided by your monthly gross income:

DTI % = Monthly Debt Payments ÷ Monthly Income

For example:

Your total monthly debt payments: $1,250
Your total monthly gross income: $6,000
Divide debt payments by gross income: $1,250 ÷ $6,000 =
20.83%
Your DTI: 20.83%

What you're left with is a ratio that tells a lender how much of your income is used to pay debts, thereby telling the lender how much more debt they're willing to lend to you. In this case, lower is better.

There are some basic rules of DTI, such as what is the maximum ratio is or what to include in you debt payments, but we won't cover that in this article. If you're interested you can learn more here.

How to Improve Your DTI?

Lowering your DTI is mathematically quite simple, but it does take commitment and a plan to get there. The basic way of lowering your DTI is to either:

  1. Increase your income,
  2. Lower your debts, or
  3. Do both.

Increase Your Income

Just because you make extra income every once in a while don't expect lenders to count that income. You need to show lenders that your income is consistent and reliable if you want that income to count towards your DTI calculation.

Alternatively, if the extra income you make cannot be used in your DTI calculation, you can use that extra income to pay down your debts!

1. Increase Your Job Salary

Easier said than done, but have you asked your boss how? Perhaps there are new positions, new skills you can learn, additional hours you can work, or is it time for a new job at a new company?

2. Offer Your Services Independently

Selling your expertise as an independent consultant is a major shift in today's global economy. Don't quit your day job though, and make sure your side consulting gig doesn't interfere with your stable employment income.

3. Rent Your Parking Spot

If you live near popular attractions such as the beach, airports or urban downtowns and have an empty parking space then you can rent it out and make money. Check out JustPark and ParkWhiz to see if this is something you can do.

4. Do Market Research

If you like to perform research then why not get paid for it! Some people claim to make $100 to $150 a day. You can find a list of research companies at GreenBook.

5. Become a Freelancer Writer

If writing is a passion of yours and you're an expert on a topic why not write and get paid. Writing is constantly in demand and can be a consistent source of income. Check out blogging jobs at Problogger to start.

6. Become a Tutor

If you were one of those A students who likes to help others then becoming a tutor may just be the perfect fit. You can find a local tutoring company or tutor online by signing up at tutor or Kaplan.

7. House Sit

Some people who travel for their job or for pleasure often need a house sitter. The pay varies depending on the duties that you need to perform while they're gone but a typical range is from $25 to $50 a day.

8. Become a Driver

Companies like Lyft and Uber are turning people into drivers. Drive when you want and earn when you want. Some drivers from Lyft and Uber claim to make up to $70k a year in San Francisco and up to $90k in New York.

9. Become a Virtual Assistant

As a virtual assistant you can work from home or just about anywhere as long as you get the job done. Some virtual assistant make anywhere from $10 to $30 per hour. You may want to consider becoming certified to get more assignments at an organization such as assistu.

10. Become a Translator

If you know a second language and are detail oriented, then translating may be an excellent opportunity to make more money. Take advantage of your language skills and get paid. As a translator you can work at your own pace. translatorsbase is a great example of a site where you can find translation jobs with some projects paying more than $500.00!

11. Social Media Expert

If you love to be on social media and have lots of followers you can make money by promoting other people products. According to Business 2 Community you can make $750 for 3 hours a week plus meetings.

Reduce Your Debts

In addition to making more income you can reduce your total debt payments.

Only debt commitments such as your credit card bill or student loan payment is counted in your DTI calculation. Regular living expenses such as groceries and cell phone bill do not count. What you'll want to do is to reduce your debt commitments, and/or reduce your expenses so you can use the extra savings to pay down your debts.

12. Pay More Towards Your Debts

Pay more than your minimum to pay off the principal balance quicker. For example, if you owe $1,000 on your credit card at 20% annually and make a minimum payment of $20 it'll take more than 8 years to pay off your debt!

13. Become a Chef

Eat at home. If you eat out for breakfast, lunch and dinner, you'll spend more than $9,000 annually! If you only ate out for lunch you'll still spend more than $2,400. Eat before leaving the house, pack a lunch and cook a meal for dinner.

14. Shop Necessary Bills

You may not have an option to shop necessary bills like water and electricity, but you can shop other bills such as car insurance and cell phone service. By doing so you can save over $1,500 per year! It all adds up.

15. Eliminate Unnecessary Expenses

Do you really need cable television? Why not eliminate it and save $600 per year? If you need your television fix, try services such as Netflix. At $8 per month you'll still get to view shows and movies and save hundreds per year.

16. Explore Your Community

The best things in life are free, or pretty darn cheap! Going to the park, hiking or just taking an evening stroll is not only healthy, it's free. Checkout Meetup for local events. Explore new interests and meet people to do it with.

Start Now To Improve Your DTI

Improving your DTI doesn't come over night, but it can be done with commitment and the right decisions. So start now and improve your DTI. Your bank account will thank you for it, and you'll be rewarded by your lender with a better mortgage.

If you have additional tips, please share it in the comments so others can benefit as well.


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