What is DTI, and why does it matter for a HELOC?
DTI, or debt-to-income ratio, is a financial metric that compares your total monthly debt payments to your gross monthly income. Expressed as a percentage, it helps lenders assess how much additional debt you can manage. For instance, if you pay $1,000 a month toward debts and your gross income is $5,000, your DTI is 20%.
A low DTI signals strong financial health, making you more likely to qualify for a home equity line of credit (HELOC). If your DTI is too high, lenders may limit how much you can borrow.
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What is the maximum DTI for a HELOC?
The maximum DTI for a HELOC could be as high as 50%, but it’s more frequently around 43%, depending on the situation and the lender. In other words, if your debt exceeds half your income, you generally won’t qualify for a HELOC.
Lenders lean on your debt-to-income HELOC ratio because it indicates whether you can repay the loan.
How do you know your exact number? Calculate your DTI by following these three steps:
- Add up all your current monthly debt payments. If you have debt and make a monthly payment, it should go on the list. Include mortgage payments, car loans, credit card minimums, student loans, and any other recurring debt.
- Divide this number by your gross monthly income. Remember: “Gross” monthly income is your income before taxes and deductions, which should give you a little leeway.
- To get a percentage, multiply the number by 100. For example, if you divide $2,000 into $8,000, you’ll get 0.25. Multiply by 100, and you have 25, or 25%. This number would keep you well under the maximum DTI for a HELOC.
The higher the DTI, the greater your current debts weigh down your financial flexibility. But if you have no debt and a healthy monthly income, the lender can reasonably deduce that you’re likely to pay off the HELOC.
Can other HELOC application strengths compensate for a high DTI?
Maybe you have a high DTI, but you’re still convinced you have the financial flexibility to pay off the HELOC. Are there other places you can score higher on a lender’s checklist? Higher income? The potential for future pay increases? A great credit score?
A few exceptions could apply:
- If you have a high DTI but a more substantial income—say $20,000 per month—this would indicate you have more flexibility than the average person. With a surplus of $10,000 per month, you’d have much more wiggle room to pay off the HELOC, even with the high DTI.
- If you have a strong credit score, such as a FICO above 740, it shows strong financial responsibility on your part. A lender may perceive you as a lower risk because you’ve been so great at paying off other debts. But don’t be surprised if you still must pay higher interest rates in this situation. The lender may simply want to reduce their overall risk.
DTI is just one number among many that lenders use to rate your debt-to-income HELOC readiness. Remember, it all comes back to one question: How will you be able to pay off this loan?
What to do if you’re denied a HELOC due to high DTI
If denied a HELOC due to your debt-to-income ratio, the obvious step is to work on either side of the ratio. Mathematically, you’re locked into two options: Pay off your debts or raise your income.
But those options aren’t always feasible, especially in the short term. What else can you do?
- Ask the lender why you were denied. Sometimes, lenders will be forthright and explain that, for example, your credit rating (and not your DTI) was the deciding factor instead.
- Work on your home equity stake. If you don’t have enough equity for the HELOC, you might be able to change your amount of home equity by asking for a new appraisal.
- Change the size of the loan. If you were denied this HELOC, you might be able to secure funds by just asking for less. If you were planning on securing a HELOC for renovations, for example, you might need to tamp down your budget.
6 tips to get a HELOC even with a high DTI ratio
Below are ways you might be able to get approved with a DTI above 43%.
- Improve your credit score. A credit score isn’t always make-or-break, but it can help instill lenders with more confidence if you have a high DTI. Remember that your credit score consists of variables, including on-time debt payments, credit utilization (credit balances versus credit available to you), and letting time pass where you don’t borrow any new money.
- Try a different lender. This is a marketplace, after all—you’re free to check out the competition. Different lenders may have unique requirements. You can also use any lessons you gleaned from the first application to help shore up your application with the new lender.
- Acquire more home equity. You can either pay down more of your mortgage (typically a slow process) or have your home reappraised. The more home equity you already hold, the easier it will be to borrow against it.
- Check out a local credit union. Local credit unions may have regulatory requirements different from national lenders, so be sure to consider these lenders as potential opportunities.
- Add a cosigner. A trusted cosigner or co-applicant on a HELOC—especially if they have especially low DTI themselves—can work wonders for your assessment as a credit risk.
- Pay off debt. This one may try your patience, but if you put any available free money toward paying off debt, you can score a quick DTI win. If it can get your DTI under the mark with a specific lender, you could get approved when you reapply.
To improve your DTI, you can look for ways to lower your monthly debt payments. You can do it in addition to paying down the debt listed in No. 6 above.
However, if you lower your interest rate or are able to consolidate higher-interest-rate debt, you can begin to lower your monthly debt payments.
Eric Kirste, CFP®
Our recommendations for the best HELOCs for high debt-to-income ratio
Do HELOCs affect your DTI ratio?
Yes. When the HELOC incurs a new payment, it will factor as debt in your debt-to-income ratio. The more you borrow (and the more monthly payments you have), the higher you can expect the DTI to be, all else being equal.
Keep this in mind any time you take out a new line of credit: If the monthly payment eats into your DTI and throws it over the maximum threshold for certain types of loans, it could affect your ability to borrow in the future. That’s especially risky if you have other goals.
But HELOCs also aren’t like many other types of loans.
If you’ve drawn none of the credit line yet, the HELOC doesn’t go on your bottom line as a debt payment. So you can have a HELOC available without changing your DTI. Consider that when you’re prepping for other loan applications.
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