How to Improve Your Debt-to-Income Ratio for HELOC Eligibility

Published May 18, 2022

Many Generation-X and millennial homebuyers know firsthand that it can take time to improve a debt-to-income ratio for HELOC eligibility. Members of these generations often find themselves in a tough spot. Student loans and medical debt are major factors that prevent these generations from accumulating wealth and assets. This, by extension, can affect homeownership.

If you need a home equity line of credit but have a lot of non-mortgage debts, you can take certain steps to improve your financial circumstances. Maybe you want to secure a HELOC, which will enable you to consolidate your existing debt by using your home as collateral. You may want to use a HELOC to make investments or improvements to your home. Doing so can elevate the value of these assets and help you become more financially stable.

If you find that you’re negatively affected by your debt-to-income ratio for HELOCs and don’t meet the requirements, get in touch. Our consultants will sit down with you and discuss your possible paths forward. We have also included some guidance on how to independently prepare before having discussions about consolidating debt.

What is the ideal DTI ratio?

You’re already well aware that lenders will look at your DTI ratio. They want to determine the likelihood of any borrower repaying their loans. Qualifying DTIs depend on the loan product and principal amount, but a DTI ratio of less than 36% is the most-used figure. Keeping that in mind, some loan amounts or products may require accept DTI ratios as high as 50%. If you’re not sure whether you have a qualifying debt-to-income ratio for a HELOC, give us a call. We can help you figure it out.

If this is a cause of concern, you can improve your debt-to-income ratio for HELOC eligibility requirements. Some ways to enhance your DTI are by:

• Increasing your income: If possible, look for additional work. You can also add another applicant to your loan application. If you co-sign, make sure that the person meets all the same qualifications.

• Reducing your debts: Start seeing where you can limit your spending each month. It can help to first tackle and eliminate smaller and easily managed debts.

• Talking to a lender: Bouncing ideas off a professional can help ease your burden. You can schedule an appointment with one of our mortgage consultants. Our consultants will answer any questions or review your finances to help you understand your debt-to-income ratio for HELOC eligibility.

How to use a HELOC to manage debts

Choosing to use a HELOC to strategically manage other debt is a big decision. Your financial preferences and specific needs will dictate whether you decide to get a HELOC or another type of loan. If you choose to go the HELOC route, then you’re already aware that it works as a pay-as-you-go proposition, like credit cards. You can dip into it as you need to for paying down your student loan, credit card, or medical debts. HELOCs ultimately offer more flexibility if you need to balance multiple debt payments, or if an emergency arises.

Improving your debt-to-income ratio for HELOC eligibility can benefit you in multiple ways. If you have student loan debt, some pros of taking out a HELOC are:

• Accessing lower interest rates: You can sometimes get a lower rate on a HELOC than your existing student loans depending on whether they are private or federal. You may not save interest if you took out a federal loan, but former students with a private loan may find certain benefits.

• Consolidating your loan: If you’re paying lenders separately, a HELOC can help you to combine different student loan payments. Paying one lump sum can let you be proactive.

• Obtaining lower monthly payments: Lowering your debt-to-income ratio for HELOC eligibility can help you access lower monthly payments. You will only need to pay the HELOC interest during the initial draw period in the first 10 years. That rough period will give you additional time to bolster your financial standing.

Potential disadvantages of using a HELOC

As beneficial as you may find HELOCs for paying down these types of debts, you should know both the pros and cons. Make sure to consider all possible financial implications. A few of the long-term disadvantages can be:

• Your credit score dropping

• Ceased tax benefits

• Misleading initial draw period

• Losing your home

When you prepare your debt-to-income ratio for HELOC applications, you’re signing off on using your home as collateral. Using your home in this manner is risky regardless of the benefits. Our consultants will closely review your finances to ensure that you make the best decision. You can also use our mortgage calculators to evaluate if now is the time to get a HELOC or if you should keep improving your DTI ratio.

Why does a low DTI matter?

You may not brag about DTI ratios at your dinner parties, but a lower DTI will help you in the long run. People who carry less debt can focus on potential investments and prepare for a worry-free retirement. A few specific advantages for achieving a low debt-to-income ratio for HELOC eligibility are:

• You can more easily qualify for certain loans.

• You can access better interest rates and financing deals.

• It keeps you focused on monitoring your credit score.

• You can breathe a little easier.

There are concrete reasons why a low DTI benefits homebuyers, but you cannot put a price on your peace of mind. As you move ahead with your long-term plans, achieving a lower DTI can broaden your financial opportunities. It can also provide you with security by making expected and unexpected financial challenges more manageable.

The first steps toward getting a HELOC today

Navigating debts and qualifying for loans are the parts of adulthood that so many individuals feel ill-equipped for at any age. It’s important to remember that you’re not alone when handling these situations. The right lender, like American Financing, can help you to find favorable terms as you prepare to take out a HELOC loan. Discussing the best ways to lower your debt-to-income ratio for HELOC eligibility will help you better understand what’s expected on your end and avoid any pitfalls.