The dreaded debt ratio holds many borrowers back from obtaining a mortgage, especially those that are self-employed. Because your income is not as straightforward as someone with a consistent salary and W-2 to prove it, you have to be more creative with your monthly debts in order to get your debt ratio down. The typical maximum for a Qualified Mortgage is 43 percent, but you have to have other factors that fall into line, such as predictable income in order to qualify under those guidelines. Lenders that are willing to offer alternative documentation loans, such as bank statement loans, are able to be a little more flexible with the debt ratio, but they still want it as low as possible. Here are a few simple ways to ensure your DTI is not out of control in order for you to get approved for a more unique loan program.
Refinance your Debts
You can have outstanding debt and still get a mortgage. What lenders care about most is the monthly payments you must make. If your current payments take up a large portion of your monthly income as they figure it based on your last 12 to 24 months’ worth of bank statements, then you may have a harder time qualifying. If this is the case, try refinancing those debts. A few examples include:
- Student Loans – If you have numerous student loans that were previously deferred or that you are still paying on despite having them for many years, they can really take up a large portion of your monthly income. Rather than paying several loans per month, try to refinance them into one loan with one low payment. This might extend the length of time it takes to get the loans paid off, but with the lower payment, you have more income available for a mortgage payment.
- Credit Cards – Minimum credit card payments can add up when you have many of them going on at once. If you are able to apply for one card or even one personal loan that can pay off all outstanding credit cards, leaving you with one payment, you will likely free up some of your money for your mortgage payment.
When you refinance your debts, make sure the terms are favorable to you and that your new payment will be less than the combined payment of the multiple debts it is paying off. If you refinance credit cards, make sure to close out those cards so that they are not providing you with more available credit than is necessary as that can have an impact on your overall credit score, which plays a role in your eligibility as well.
Pay Debts Off
If you recently started your business and have a lot of outstanding credit because of the costs necessary to start the business, try to get those debts paid off as soon as possible. The quicker you pay the debts off, the higher your credit score will rise and the lower your debt ratio will become. The more bank statements you are able to provide the lender with for a bank statement loan, the better your rate will be, so try to get those debts paid off in the beginning stages of starting your business, allowing your income to accumulate after the fact. This way when you show the lender 24 months or more of banks statements, you are able to have a lower debt ratio because you paid off those initial debts that helped you get started.
Wait Until you are in Business for a While
Along with the ability to have fewer debts, being able to show at least 24 months of bank statements will help you be able to have a higher qualifying income. When you just start your business, income can fluctuate quite a bit during that first year. If you wait 2 years and your income steadily increased, your 24-month average income will be higher than the 12-month average, which means you will have more income to use for your debt ratio, bringing it down even lower.
Managing your debt ratio in order to qualify for bank statement loans is one of the most important ways to get a loan as a self-employed borrower. There are many lenders that offer alternative documentation loans, giving you plenty of opportunity get a mortgage even though you are self-employed. The key is to have all of your documents in order and your debts as low as possible in order to maximize your qualifying income. Apply with a variety of lenders for a bank statement loan to ensure that you get the best rate and terms available today!