Can I Refinance If My Debt-To-Income Ratio Is Too High?

A high debt-to-income (DTI) ratio can make it challenging to qualify for a mortgage refinance. But that doesn’t necessarily mean you’re out of options. With the right strategy, you may still be able to refinance your home loan even if your DTI is higher than lenders prefer.

What Is Debt-To-Income Ratio?

Your debt-to-income ratio shows how much of your monthly income goes toward paying off your debts. To find it, divide your total monthly debt by your monthly gross income.

For example, if your monthly debts like credit cards, auto loans, student loans etc. add up to $2,000 and your gross monthly income is $5,000, your DTI would be 40% ($2,000/$5,000).

In general the lower your DTI ratio the better because it shows lenders you have enough income left over after paying debts to comfortably make a new mortgage payment. Many lenders prefer a DTI of 43% or less for refinance loans.

DTI Limits for Refinancing

When refinancing your mortgage, here are some common DTI requirements from major lenders:

• Conventional loans – Usually limit DTI to 45% or less
• FHA loans – Allow DTI up to 50%
• VA loans – No set DTI limit, but most lenders want 41% or less
• USDA loans – Limit DTI to 46%

Therefore, if your DTI is more than 45 to 50 percent, depending on the loan program, you might not be able to get a refinance from a traditional lender.

Strategies to Refinance With a High DTI

Just because your DTI is high doesn’t necessarily mean you can’t refinance your home. Here are some tips for getting approved even if your debt-to-income ratio is over the typical limits:

1. Pay Down Debts

Getting rid of some of your monthly debt payments can help lower your DTI. Payments on credit cards, auto loans, student loans, and other debts can be lowered by paying them off first. This lowers your total monthly debts, which are used to figure out your DTI.

2. Add a Co-borrower

When you add a co-borrower to your refinance application, their income is added to yours, which lowers the loan’s overall DTI. This can help if the individual DTI is high and raise the chances of approval.

3. Increase Your Income

Boosting your income through a promotion, second job, freelancing, etc. can lower your DTI by raising the gross income used in the calculation. Show lenders you’ve increased your earnings.

4. Improve Your Credit Score

A higher credit score can sometimes help lenders overlook a high DTI. Good credit won’t change your ratio but shows your creditworthiness.

5. Lower Your Loan Amount

Refinancing for a lower loan amount than your current mortgage lowers your monthly payment. The lower payment decreases the debts used to calculate DTI, improving your ratio.

6. Use Cash-Out to Pay Off Debts

A cash-out refinance provides funds you can use to pay off debts immediately. This lowers your monthly payments and DTI. But cash-out has higher rates.

7. Apply With Alternative Lenders

Online lenders, credit unions, community banks, and mortgage brokers may offer refi programs more flexible on DTI limits than big banks.

8. Wait For Improved Finances

If you have an expected financial change on the horizon like a salary bump, wait until after to refinance when your DTI is improved.

9. Refinance With FHA, USDA, or VA

Government-backed refi programs from FHA, USDA Rural Development, and VA allow higher DTI ratios than conventional loans.

10. Provide Significant Assets

Lenders may approve a high DTI refi with proof of substantial assets as reserves. Savings and investments show financial strength.

How High of a DTI Can You Refinance With?

There’s no one-size-fits-all maximum DTI that you can refinance with. It depends on factors like:

• Your credit score and history
• Type of loan and lender guidelines
• Your reserves and assets
• Additional compensating factors

Typically, you can refinance with a DTI up to:

• 50% with FHA and VA loans
• 47-50% with conventional loans from some lenders
• 55% or higher in some cases with a strong application

So even if your DTI is up to 55%, with the right lender and loan program, a refinance may be possible in some situations. Shop multiple lenders to find one able to approve your application.

Should You Refinance With a High DTI?

Just because you can refinance with a high DTI doesn’t necessarily mean you should.

The higher your DTI, the more precarious adding another monthly mortgage payment may be for your budget. If you’re already stretching to pay current debts, taking on more debt is risky.

That said, sometimes a refi with a lower rate and payment but higher DTI makes sense if you come out ahead by saving on interest.

Run the numbers to see if lowering your rate saves you enough monthly to justify the higher obligation ratio. Avoid cash-out refinancing where you take equity out if DTI is already high.

Alternatives to Refinancing With High DTI

If refinancing with a high DTI doesn’t make sense for you right now, consider alternatives like:

• Paying down current debts aggressively
• Working on improving your credit score
• Increasing your income with a second job
• Saving up a larger down payment for when you buy a home
• Waiting a year or two for improved finances to refinance later

The most important thing is putting yourself in a better financial position long-term. A refi provides short-term savings, but getting your debts and income balanced is critical.

The Bottom Line

It is possible to refinance a mortgage with a high DTI ratio in many cases. Shop multiple lenders to find one that will approve your application. Government-backed loans allow higher DTIs than conventional loans. Or improve your financial profile to qualify for better rates if you can.

With the right approach, homeowners with high debt can often still benefit from refinancing at a lower interest rate or cashing out home equity if needed. But carefully consider if it fits your goals and budget before proceeding.