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How do you find a lender to approve your unsecured personal loan when you have a high debt-to-income (DTI) ratio?

Your DTI ratio is not part of your credit risk score. However, banks use the calculation as an additional underwriting tool to project the affordability of a new loan.

This means that managing to what the fraction will be in the future (not today) is the secret to success. Follow these two strategies.

  1. Work with online lenders who specialize in debt consolidation
  2. Take steps to lower the ratio and improve your qualifications

Qualifying for Loans with High DTI

The best way in the short run to get a personal loan with a high debt-to-income (DTI) ratio is to work with a specialty lender that operates online. The company you turn to matters.

The lender most likely to approve a request specializes in working with borrowers struggling under a mountain of bills. These lenders focus more on your ability to repay the obligation after restructuring all of your bills into a single payment that is more affordable.

Debt Consolidation

Request a debt consolidation loan for high debt-to-income ratio borrowers here. Select debt consolidation lenders specialize by weighing your projected DTI after you pay off existing credit cards, medical bills, and other installment contracts with bigger monthly payments.

Lowering your projected monthly debt service level is the key to getting a debt consolidation loan with high DTI approved. Since boosting your income is more difficult in the short-term, dropping your monthly payments could be your best option right now.

Debt consolidation loans can structure outlays within your means in two possible ways.

  1. Lowering the interest rates paid on all obligations can decrease monthly payments. However, this may prove difficult if your projected DTI remains elevated.
  2. Lengthening the terms also decreases monthly payments. Most borrowers opt to extend terms even though this allows interest charges more time to accumulate.

Debt consolidation works best for high DTI borrowers because you are restructuring obligations – not adding to them. Spreading outlays further into the future makes it more affordable in the short run but does add to interest costs over time.

Acceptable Ratio

An acceptable debt-to-income ratio for an unsecured personal loan will be slightly below one for a secured mortgage. Lenders of unsecured obligations cannot foreclose on a house in the event of default; they must file a lawsuit to garnish wages. Therefore, expect a lower risk tolerance for unsecured signature loans.

However, we can use conventional mortgage lending standards to provide benchmark DTI ratios.

  1. Front End (28%) includes mortgage, insurance, and taxes
  2. Back End (36%) includes all other obligations

Every online personal loan lender will have unique internal rules about acceptable DTI percentages. Also, your employment history, income sources, and credit score factor in. Try to keep the percentage below the 36% level to increase approval odds.

Debt Service Income Source
Credit Cards Job Employment
Car Loan Self-Employment
Mortgage/Rent Benefits
Medical Bills Alimony
Student Loans Child Support

Good Credit Score

Having a good credit score is another key to getting a personal loan with a high debt-to-income ratio. A good credit score shows that your probability of defaulting on the unsecured obligation is relatively small – despite the unaffordable level of existing payments.

Maintaining a good credit score with a high DTI is possible if your consumer report shows a history of on-time payment behavior. However, the credit utilization percentage is a closely related ratio used to calculate your score.

  1. DTI = monthly debt service /monthly income. Consumer reports do not contain earnings history. Therefore, the ratio is an additional qualifier used by lenders.
  2. Utilization = amounts owed/available credit. Consumer reports do contain both of these elements, which do influence your credit score directly.

It is possible to have a low utilization percentage and high DTI at the same time. For example, a consumer nearing the end of an installment contract (mortgage, car, or personal loan) would have little debt but still have high monthly payments. This person could have a good credit score, making him or her an ideal candidate for a debt consolidation loan.

Getting Loans with Low Income and High Debt

Getting a personal loan with low income and high debt means can also mean improving the DTI ratio over time. A lender may find your case more acceptable after you reduce the percentage below acceptable levels. Again, each company uses different criteria.

There are two ways to improve your DTI just like any other fraction!

  1. Cut the numerator (monthly debt service obligations)
  2. Boost the denominator (monthly income from all sources)

Low Income

Cutting large debts down to size is the first way to improve your chances for a personal loan approval when you have low income. You could be able to accomplish this by quickly adjusting the terms of your request, by moving money around in your accounts, or by working with a settlement company.

Debt Settlement

Do you qualify for debt relief? If your low income makes it impossible to stay current and you owe more than $10,000 in unsecured obligations (credit cards, installment contracts, and medical bills), you may want to explore whether a settlement program is the best way to reduce your monthly obligations.

People in delinquency with a DTI that is too high rarely qualify for a new loan. However, being behind on bills actually speeds the settlement process along. Creditors fear to lose the entire balance and are more willing to negotiate once you have funded the escrow account.

Lengthen Payment Terms

Longer-term loans have smaller monthly payments. If you have a good credit score despite a low income, you can reduce your projected periodic installments by lengthening the repayment terms. A loan with a five-year term is more affordable than one with a one-year schedule.

Lenders consider your projected DTI percentage based, in part, upon the size of new monthly payments.

Transfer Balances

A credit card balance transfer is another way to restructure large debts when you have low income. You will need to have open to buy on a credit card account in order for this to work. Open to buy is the difference between the limit and the outstanding balance.

A balance transfer could help in three ways.

  1. Low or zero interest promotional offers save money
  2. The credit card minimum monthly payment could be smaller
  3. Paying off an installment contract could extend the time-frame

High Debt

Increasing the monthly income that you can document is the second way to enhance your chances of personal loan approval when you have high debt levels. You can boost the earnings you show with a second or side job, requesting a joint account, or by utilizing a co-signer.

Side Job

Getting a raise, a second job or starting a side hustle the safest way to overcome high debt levels. Extra money coming in every month inflates the denominator of the DTI. Follow this very simple example.

  • 1/4 = 25%
  • 1/5 = 20%

Establish a verifiable history of the extra earnings. Keep copies of any 1099 statements from any self-employment gigs such as freelancing, rideshare driver, etc.

Joint Account

Requesting a joint account is another way to compensate for high debt burdens. If your spouse also works, adding his or her salary into the mix also inflates the denominator of the DTI percentage.

Two salaries are more reliable than one, and present a safer bet for banks. Think about diversification. Keep in mind that your spouse may bring his or her own obligations into the equation – along with another credit score – which may help or hurt.

Co-signer

Adding a co-signer can help qualifications if you have low income and high debt. A co-signer does not directly improve your DTI percentage. However, a co-signer does reduce the overall risk you present to the lender.

A co-signer is responsible for tapping into his or her income if you fall behind on payments – something that is very likely when your existing obligations consume too much of your monthly revenues.