When you apply for a loan, one of the most important factors that will affect your eligibility as well as your loan amount is your DTI. Many people go into the loan application process for the first time without knowing about this calculation or without understanding its importance. If your DTI is too high, you will not be able to qualify for a loan, so knowing how to lower this number is valuable.

What is DTI?

The term DTI stands for debt-to-income ratio. This is a percentage that banks and other lenders use to determine how much debt you have. The calculation is done by dividing your monthly debt payments by your monthly income (before taxes). Lenders want to know how much disposable income you currently have. In other words, they want to know if you have enough extra income right now to make these new payments. Requirements vary for different lenders and loan types, but typically you will need to have a DTI lower than 36-50%.

This calculation is done with monthly payments as opposed to total debt, so the total amount you owe isn’t important for this measurement. Also, remember that lenders may count things as debt and income that you hadn’t thought of, and different lenders have different requirements. While you can get a good idea of where you stand by estimating your own DTI, you may get a slightly different number from your lender.

Some of the things that are often overlooked when calculating the number for yourself include child support, which can be counted as income if it meets certain qualifications, and student loan payments which may count as debt even if you are currently in deferment.

Pay Down Your Debt

Of course, the best way to lower your DTI is by paying down your debt. This is not always possible to do quickly before you need a loan, but if you can eliminate even one bill it can sometimes make a large difference in your DTI. While it can be tempting to try and pay off your largest bill first, and that may be the best option for helping your DTI, it is only one of several strategies that experts recommend.

One of the other popular debt repayment strategies is to pay off your highest-interest debt first. This is a great option for your long-term financial situation because you will be paying less interest overall. This might not have the biggest impact on your DTI, however, because your DTI is based on monthly payments rather than interest rates.

Make More Money

Another obvious way to lower your DTI is by increasing your income. If you can find a way to make a little more money, it can have a dramatic impact on your monthly DTI. When you do increase your income, it is best to use that money directly to pay down debt and you will receive a double financial benefit. You can always ask for a raise or look for a new job, but many people prefer to increase their income on their own terms by adding a side hustle.

Side Hustle Ideas

Many people prefer to do a side hustle for extra income. Some of the easiest side hustles to get started in are delivery services and ride-share services. Because these app-based jobs do the advertising for you, many people are able to start making money quickly.

Other people use the knowledge and experience they already have to do side jobs for themselves. For example, many people who work in computer repair shops find extra money working side jobs doing the same thing for friends and family. Contractors who work for large construction companies sometimes do handyman work or wood-building projects on the weekends.

Finally, consider freelance or online work. While it can be a bit harder to break into this field, it has the advantage of time freedom. For many of these jobs, you can work whenever you want, making them perfect for supplementing your regular income. If you have marketable skills in a freelance area, such as graphic design, writing, or computer skills, you may find a great side job in this way.

Refinance Loans

If you have loans with high payments or high interest, sometimes refinancing can lower your DTI by lowering your monthly payments. There are some cautions with this method, but if you have a high-interest home mortgage or a PMI payment, it can make a dramatic difference. Don’t forget that refinancing comes with closing costs that can run in the thousands, and hard credit checks can temporarily ding your credit. This doesn’t usually last long, however.

A student loan refinance can also be an option for those with high monthly payments or a high-interest rate. Remember, if you refinance your student loans you may become ineligible for some government programs in the future, but many people will never qualify for those.

Credit Card Transfer

A credit card transfer is similar to a refinance. If you find a credit card with better rates than yours, you can open an account and transfer the debt from the expensive card to the cheaper one. There are some downsides to this option, but if you have a lot of debt on a high-interest card you should consider this option.

Some of the potential negatives to watch for include a ping on your credit from the application, and a new account on your file. In general, new accounts look worse on your credit, while old accounts look better. For this reason, you don’t want to actually close your old high-interest account. Instead, you just want to transfer most of the money to the new card while leaving the old one active. In some cases, it’s also better if you leave a small balance on your old account.