Finding a mortgage lender when you have a high debt to income ratio can prove tricky if you don’t know where to look for the best deals and are unsure of how your DTI ratio has affected your credit history.
Does a high DTI ratio mean I have a bad credit score?Not necessarily, although if you have a history of money mismanagement and you have missed payments, your credit score is likely to have suffered.
Creditors pass on information about your financial agreements to credit reference agencies (CRAs) such as Experian or Equifax frequently, so to avoid damaging your credit score and report, keep up with payments and always pay on time, with the full agreed amount.
The best thing to do before you even think about applying for a mortgage is to check your credit score. Most CRAs offer free trials and if you’re unsure about how to sign up, one of our advisors can assist you.
Will my debt to income ratio affect me getting a mortgage?Lenders will calculate your DTI ratio to determine firstly whether you have debt and secondly, whether your income is sufficiently large enough to afford to pay it off. If your debts aren’t manageable, lenders may deem you unsuitable for their mortgage terms and this could lead to a mortgage rejection.
Some banks and lenders don’t accept applications for mortgages when the DTI ratio is high and the borrower has a lot of recurring monthly debt.
You may find that speaking to a professional who has overseen bad credit mortgages can help as they’ll find suitable mortgage lenders with interest rates that work for your budget because they know that if your loan is affordable, you are more likely to repay it on time and in full.
Should I try to decrease my DTI ratio?Alternatively you could reduce your debts in a bid to decrease your DTI ratio and improve your credit score as this could improve your chances of acceptance with a wider range of lenders. Ask an advisor about what your next steps are if you’d like to reduce your DTI ratio.
When it comes to working this out you have two options. You could either:
How do I calculate my debt to income ratio?
A) Do it yourself using the equation below
The debt to income ratio equation
To calculate your debt-to-income ratio you’ll need to look at your monthly recurring debt. A worrying thought perhaps but it’s better to be aware and prepared before applying for a mortgage.
Next, add up your monthly income. This might include a salary, bonus, a freelance project or any benefits or pension you receive.
Finally, divide your total amount of recurring debt by your monthly income and then multiply the answer by 100.
So if your monthly recurring debt is £300 and your income is £1,600 a month, your DTI ratio would be 18.75% because...
300 / 1,600 = 0.1875 (X 100) = 18.75
Have a broker do the hard work for you
A mortgage adviser can calculate an accurate figure for you and then search the market for lenders with debt to income ratio requirements that you would be eligible for. This saves a lot of time but more importantly, it prevents you from applying to a lender who is likely to reject you.
Avoiding mortgage rejections is crucial because they’re listed on your credit report which is used by future lenders when they access your application for a loan.
Rejections for credit, whether for a mortgage or a small loan, make other lenders question why you have been previously rejected and can result in further rejections.
How high can my debt to income ratio be if I want a mortgage?A lower DTI usually means a better credit score, which is something that lenders focus on heavily when determining the outcome of your application, as well as the interest rate that they can offer you. Therefore a lower DTI can help you to get a lower mortgage interest rate.
In the UK, there are numerous lenders that specialise in high debt to income ratio mortgages, so even if you’ve been rejected in the past, there could be an alternative mortgage option for you.
A mortgage broker’s help can be invaluable when searching for lenders because they have online access to the latest rates and will be aware of any changes within the market that could affect your application.