10 Ways to Get a Cash-Out Refinance with a High DTI
To get a conventional cash-out refinance, no more than about 45% of your before-tax income can go toward the new payment plus all other debt payments.
This is referred to as a 45% debt-to-income ratio, or simply DTI.
But what if your DTI is higher than this? Here are potential solutions.
1. Use Cash-Out Funds to Pay Off Debt
The simplest way to qualify if use cash from the refinance to pay off debt at closing.
Start with the highest payments and lowest balances first.
Balance | Payment | Payoff priority |
$5,000 | $400 | 1 |
$18,000 | $350 | 3 |
$7,500 | $300 | 2 |
In the above example, you would pay off at closing the $5,000 balance first. It will take the least dollars to eliminate the highest payment (however, see the next section for an alternate strategy).
Keep eliminating payments until your DTI falls to an acceptable level.
2. Use Savings to Pay Down (Not Pay Off) Debt
Paying down an installment loan to 10 or fewer payments removes it from your DTI calculations.
For example, a $400-per-month car loan could be paid down to $4,000. The lender would remove $500 from your DTI calculation.
You can’t use refinance funds to complete this strategy, however. It must be paid down prior to closing.
Temporarily take money out of savings, pay down the debt, then reimburse yourself with cash-out funds after closing.
You can also pay down credit cards, but you must have a zero balance to eliminate the payment. You do not have to close the credit card account.
3. Consolidate Debt
Lenders focus on monthly payment, not the balance. Consolidating large loan balances into lower monthly payments will help you qualify.
Balance | Payment | |
Loan 1 | $10,000 | $300 |
Loan 2 | $12,000 | $500 |
Loan 3 | $38,000 | $700 |
Total | $60,000 | $1,500 |
Consolidated Loan | $60,000 | $1,200 |
Consolidating three debts into one saves $300 per month in this example. Lenders will “hit” your DTI with the lower $1,200 payment in this example, even though the total balance did not change.
4. Add a Borrower
There are two parts to DTI: debts and income. If you can’t get rid of debts, add income.
You can add a borrower to your loan application. Their income (and debts) will be included in the total DTI for the loan.
The co-applicant must live in the home; no non-occupant co-borrowers allowed. Still, this could be a good solution for dual-income or multigenerational households where someone who is not currently on the loan could be assist with qualification.
5. Improve Your Credit
Mortgage approvals are based on complex algorithms that measure all aspects of the loan file.
Improving your credit score could help you overcome a high DTI. For example, someone with a 45% DTI may not be approved with a 650 score but might with 700.
6. Add Reserves
You can increase your approval chances by showing additional assets, also called “reserves.” One month of reserves is equal to the full housing payment including taxes and insurance.
In fact, Fannie Mae says you need six months of reserves if your DTI is above 45% on a cash-out refinance.
Give your lender additional retirement, checking, savings, and investment account statements.
7. Lower Your Loan-To-Value Ratio
When you get a mortgage, think of it in terms of 5% increments in loan-to-value, not dollar amounts.
For instance, if you need a $300,000 loan amount on a house that appraised for $395,000, that’s 75.9% loan-to-value.
Lower your loan amount to $296,250 to be at 75%. This could drop your loan into a lower risk tier. It could also give you a lower mortgage rate which also helps with DTI.
8. Apply for an FHA Cash-Out Refinance
FHA offers a cash-out refinance and is more forgiving about DTI.
Conventional loans have a 45% maximum DTI. But with a strong file, you can be approved with a 50% DTI with FHA.
You will incur mortgage insurance, but if you need the cash, that drawback could be worth it.
9. Wait For a Raise
When you make more money, your DTI improves. If you’re due for a raise at work, you could wait to apply until you receive it.
You could also find other qualifying income.
You could use income from a side gig, business, or second job that you have had for two or more years concurrently with your W-2 employment.
10. Wait for Rates to Drop
Even a slight drop in mortgage rates could drop your payment, reducing your DTI.
For instance, waiting for a 6.5% rate instead of 7% on a $300,000 cash-out refinance reduces your payment by exactly $100.
If you make $7,000 per month, lowering your payment by $100 reduces your DTI by about 1.5%. For example, if your DTI were 46%, it would drop to 44.5%.
Cash-Out Refinance is Possible with a High DTI
If you’ve been denied due to high DTI, keep trying. Check with at least two or three lenders, as some may offer more lenient guidelines. With a little persistence, you may be approved for the cash-out loan.
