Lower Your Debt-to-Income (DTI) Ratio Using Debt Consolidation

Your DTI ratio compares how much of your gross monthly income (before taxes) you use to cover your monthly debt payments. It helps lenders assess how comfortably you can manage your debt relative to your income.

According to the Federal Deposit Insurance Corporation, lenders may evaluate these two types of DTI ratios:

• Front-end DTI ratio: Also known as the “housing ratio,” this version is often used for mortgage approval. It compares only your monthly housing costs—including your principal, interest, insurance, taxes, and HOA fees—to your monthly gross income. Lenders typically recommend keeping this ratio at 28% or less.
• Back-end DTI ratio: More widely used by lenders and the focus of this article, the back-end ratio compares all monthly debt payments— such as your mortgage, auto loans, student loans, credit card minimum payments, and alimony/child support—to your monthly gross income. Limiting this ratio to 36% to 43% is considered ideal. However, some lenders (like BHG) might accept higher ratios, especially if you are a high earner.

Example: Imagine you have $20,000 in monthly gross income and $8,000 in monthly debt payments, of which $4,000 is your housing. While your front-end DTI ratio would be 20%, your back-end DTI ratio would be 40%.

Here are some of the key benefits you gain from lowering your DTI ratio:

• Improved access to credit: Lenders favor extending credit to borrowers with back-end DTI ratios no higher than 50%, and the limit can be even lower if you’re applying for certain mortgage programs. A lower ratio allows you to qualify with more lenders, and for higher dollar loan amounts, versus a higher DTI.
• More competitive interest rates: Since a lower DTI ratio is a good thing when it comes to risk, lenders may be more willing to offer you lower interest rates on various types of loans and credit cards. These savings appear in both your monthly payment and your long-term borrowing costs.
• More financial flexibility: Allocating less income to debts frees up cash flow for other purposes and reduces your financial stress. Plus, as you make timely payments on your consolidated balance, you’ll reduce your credit utilization, which can improve your credit score and make achieving future financial goals easier.

Debt consolidation combines multiple balances into a single new loan—ideally with a lower interest rate or longer term. This process reduces your required monthly payment and, with it, your back-end DTI ratio.

Common ways to consolidate debts include:

• Taking out an unsecured personal loan
• Doing a credit card balance transfer (watch for 0% intro offers, transfer fees, and penalty APRs)
• Using home equity loans or HELOCs (secured by your home)
• Getting a credit union debt consolidation loan

Keep in mind, if your DTI ratio is already very high (often 50%+), you might have challenges getting approved and receiving favorable offers. Beyond that, extending a loan term lowers your monthly payment (and DTI ratio), but it can also increase the total interest paid over the life of your loan.

Before consolidating debt to lower your DTI ratio, take time to better understand your current debt situation, review multiple consolidation options, and create a plan for the period after consolidation. Here are six steps that will guide you through the process.

1. Calculate your current DTI ratio

To calculate your current back-end DTI ratio, simply divide your total existing monthly debt payments by your gross monthly income. While you can use an online DTI ratio calculator for this, you can also do the math manually or use a spreadsheet.

To find your gross monthly income, total all the income you receive from your job, business, investments, and other sources. Review documents such as pay stubs, tax returns, bank and brokerage statements, employment contracts, and award letters. (Keep these handy, as lenders may require you to substantiate income using these documents during the approval process.)

When totaling your debts, don’t account for extra principal payments, utility bills, or any discretionary spending.

This quick worksheet can help you add up your debt payments:

2. Inventory your debts

Create a complete, accurate inventory of all the debts you want to consolidate. Use your loan documents and statements to identify and list the following details for each account:

• Lender name
• Account balance 
• Repayment term remaining (if applicable)
• Minimum payment amount
• Due date
• Any promotional terms ending soon

3. Explore and compare debt consolidation options

Use the table below to compare different options for consolidating your debt:

4. Model the impact of your consolidation scenarios

To know whether consolidating debt will meaningfully impact your DTI ratio and cash flow, go through some before-and-after scenarios. Let’s look at a simple example.

Before consolidation

Assume you start off with the following financial details:

Gross monthly income: $15,000

Current minimum payments

• Mortgage: $3,500 against a balance of $450,000
• Auto loan: $700 against a balance of $20,000
• Student loan: $500 against a balance of $25,000
• Credit cards: $1,200 against a balance of $35,000
• Personal loan: $1,000 against a balance of $15,000

Dividing your current minimum monthly debt payments ($6,900) by your monthly gross income ($15,000) results in a starting DTI ratio of 46%.

After consolidation

Imagine you decide to consolidate the $35,000 of credit card debt, and the $40,000 student and personal loans into a new fixed-rate $75,000 personal loan with 10% APR. This would give you a monthly payment of $1,245, cutting your current monthly payment on those debts in half.

After the transaction, your new monthly payment will be $5,445 of your $15,000 monthly gross income. This frees up $1,455 of your cash flow for other purposes.

Your new DTI ratio is now a more ideal 36% thanks to the lower payment amount.

5. Find a debt consolidation loan that works for you

If you find that debt consolidation is a good idea for improving your DTI ratio and financial flexibility, consider these factors to choose the best consolidation loan for your needs:

• Eligibility: You'll need to meet your lender’s debt consolidation loan requirements, including having a strong credit score, stable income, and an acceptable DTI ratio. Some consolidation options, such as HELOCs, home equity loans, and mortgages require having a minimum amount of equity in the property and meeting other rules.
• Loan amount: While borrowing the maximum loan amount may seem appealing, it can make your debt harder to manage and increase your costs. So, consider borrowing only what you need to consolidate your debt.
• Interest rates: While rate is not the most important aspect for lowering DTI, it does tell you the rough annual cost of borrowing. Research and compare rates for different lenders and consolidation options, including fixed versus variable rates, which can determine monthly payment predictability. A 1% rate increase on the $50,000 illustrative personal loan means a little less than $500 additional interest cost in the first year, or about $40 a month.
• Fees: Pay attention to balance transfer fees for credit cards, origination fees for personal loans, closing costs for home equity products, and credit union-specific fees for consolidation loans. Being able to finance the fees within the loan can save out of pocket costs, but increase lifetime interest and monthly payment. Also, check whether there are prepayment penalties, which the Consumer Financial Protection Bureau says aren’t allowed for specific loans in select states.
• Loan term: Term is the most important aspect of lowering DTI. Longer loan terms help lower your monthly payment, but can increase interest costs. You may be able to pay off your loan more quickly than the original term by making additional payments if your lender allows. Compare monthly payment amounts for different terms to find the right balance between affordability and interest savings.
• Funding speed: While BHG Financial offers prompt funding for its unsecured personal loans, other options that involve home equity can take several weeks or even months. Carefully consider the timing to benefit from consolidation as soon as possible.

6. Maintain healthy financial habits after consolidation

Consolidating debt is just the starting point. Take the following steps to protect your progress, lower your DTI ratio, and keep your finances more manageable:

• Build up your emergency savings and use budgeting apps to stay on track, giving you a financial cushion so that unexpected expenses don’t derail your progress.
• Avoid new balances on paid-off accounts, so you don’t re-accumulate debt and raise your DTI ratio.
• Set up autopay so your positive payment history continues.
• Use a simple 50/30/20 budget to balance your needs, wants, and debt repayment/savings, keeping your spending aligned with your goals.
• Use the debt avalanche or snowball methods to direct extra cash to either the smallest balance (snowball) or the highest rate (avalanche) to accelerate payoff and reduce interest costs.

For high-income professionals and business owners, BHG Financial offers tailored unsecured personal loans—up to $250,000¹ with competitive rates and terms up to 10^1,2 years, all designed to lower your monthly payment and DTI ratio.

Our personalized solutions can address your complex financial needs so you can manage your debt effectively. Rather than juggling multiple monthly payments with varying interest rates, you’ll have a single, predictable monthly payment aligned with your budget and payoff goals. Plus, you’ll get dedicated support from our U.S.-based loan specialists.

If you’re ready to take the next step, start with our hassle-free qualification process, which won’t affect your credit score.³ You may be approved in as little as 24 hours⁴ and receive your funds in as few as 5 days. ⁴