Advice on Lowering DTI

[tianapb725]

I'm trying to arrange my finances so I can hopefully apply for a mortgage next year (and a half if need be).  The money I would be putting away for a downpayment is $500 a month (sometimes $750, but the extra $250 I will keep as an emergency fund).  I want to pay off debt, but strategically I'd like to allocate it so it lowers my DTI the fastest.

Here is the info (balance/limit/minimum mo pmt):

Chase: $4067/$7K/$83

Citi: $5659/13.5K/$136

BoA:  $2775/$7K/$49

Personal loan:  $173/mo - scheduled payoff date: 05/15/2013

Auto loan:  $444/mo - scheduled payoff date: 05/30/2015

Student loan: $275/mo - never ending!  Haha kidding, they will all end in 15 years, 2025.

Currently my DTI sits at 55% if I were to get a mortgage that would cost me $1100/mo.  I currently make $46/yr.  As much as I want to pay off off the credit card debt, my initial thought was to use the $500/mo towards the auto loan as that is a big part of my DTI, then I could refinance in a year to lower the monthly payments.

The advice you all give is great and I appreciate your feedback!

[luvs2barre]

I personally would tackle the debt with the highest interest rate first. And tackle the debt in the order of highest interest rate to lowest. Most likely the interest rate on your credit cards are higher than your car loan. Once the credit cards are paid off then you could roll the minimum payments that you were making with the $500 to tackle your car loan.

Good luck!

[Jazzzy]

To lower your DTI the fastest, you need to pay off the debt in order of the largest monthly payment amount...but that would be your car.

You don't, however, want to pay off a car while you've got credit card debt. I agree with the above post. Start with the highest interest rate and throw every dollar you can at that while paying the minimum amounts on everything else. When the first one is done, tackle the next highest interest rate card.

That's what makes the most financial sense.

[DallasLoanGuy]

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@Anonymous wrote:

I personally would tackle the debt with the highest interest rate first. And tackle the debt in the order of highest interest rate to lowest.

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Cass, I am going to disagree with you a little bit.... well, a lot.

Look into Debt Stacking.

http://www.google.com/search?q=debt+stacking&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-USfficial&client=firefox-a

By paying off the smallest amount first, that freed up money can go onto the next debt payment.... accellerating the pay down.

Some might disagree with the strategy because it goes against conventional wisdom.

 Debt stacking isn't a 'scheme' and doesn't require you to sign up for anything.... though some sites will try to sell you info.... avoid that.

Some people call it pyramiding..... if that is a word.

[Jazzzy]

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@DallasLoanGuy wrote:

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@Anonymous wrote:

I personally would tackle the debt with the highest interest rate first. And tackle the debt in the order of highest interest rate to lowest.

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Cass, I am going to disagree with you a little bit.... well, a lot.

Look into Debt Stacking.

http://www.google.com/search?q=debt+stacking&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-USfficial&client=firefox-a

By paying off the smallest amount first, that freed up money can go onto the next debt payment.... accellerating the pay down.

Some might disagree with the strategy because it goes against conventional wisdom.

 Debt stacking isn't a 'scheme' and doesn't require you to sign up for anything.... though some sites will try to sell you info.... avoid that.

Some people call it pyramiding..... if that is a word.

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Also known as the debt snowball.

It helps many people psychologically. Even though it doesn't make the best financial sense, it gives them a mental boost to see balances at zero quicker (even though they are still paying higher interest on the higher amounts).

Depends upon what a person needs.

Whether you start with the smallest balance or with the highest interest rate debt, pay everything extra towards one debt until it is zero, then add whatever that minimum payment would have been to the next debt you want to tackle. Both methods work in the end. One just gets you there faster.

[Anonymous]

current credit card debt = 268 per month

Loans total =892 per month

Total income = 46K per year = 3833 per month.

current debt = 1160 per month or  30.25 % DTI = 59% DTI if I added correctly (or about 18% over the maximums for alot of lenders)

To meet guidelines you would have to pay off the car and the credit cards, or pay off the cards and all the loans except the car.  Basicly, you have about 1600 to work with as far as debt amount and stay within guidelines.  In any case, it seems to make more sense to start on the CC since I am assuming paying off the student loans is not a possibility.  Your best bet would be to pay off all CC (to maximize FICO score) and get the personal loan paid off.  Once they are paid, then your DTI, although still a bit high, would be accompanied by a very high FICO score I ma guessing if you are at 700+ right now and give the UW extenuating circumstances to allow the higher DTI due to the 2 loans left. 

Honestly, at current income levels (and assuming you are not putting a huge chunck of cash down or it could be going towards debt) I think you will only have to pay off 2 of the following 4 to really have a chance:

All credit cards (while not allowing any more balances of any consequences to come up...)

student loans

car

personal loans

More info that might make an answer easier, what are the balances on the car, student, and personal loans...

For DTI purposes only, you could pay off$ from the loans with a card it will show a lower DTI just make sure you have a VERY set plan on dealing with that debt that could become a huge weight around your shoulders.  I do not recommend this, by the way...

[tianapb725]

Thanks for everyone for their advice!

I currently don't have anything saved for a downpayment (I am using 10K from my 401K, but I am going to have additional savings from that once this debt is paid off).  I used what I had saved for the downpayment and put it towards debt, which was 4.5K, so basically I'm starting over.

Here are the debt balances:

Personal loan:  $5,400 APR 13.49%

Student loans:  $48,418 APR One is 5.25%, the other is 2.625%

Auto loan: $23K APR 6.99%

I hope that once the cards are paid off, I will go to the 740+ range and be able to have some wiggle room.  I'm certainly not going to rush anything, hence why I used my downpayment to put towards debt.  I just want to have a gameplan when I am actually ready to apply.

Many thanks for the help!

[Anonymous]

Here is what I would do in your shoes.

Pay every penny you can on the credit cards.  Get that debt paid off.  You will see a rise in FICO and a lowering of DTI.  I wold literally put every penny I did not need into it.  If something pops up that is a true emergency  (not a sale at the mall, lol) you can alwasy charge it short term and double up to pay it right back off.  Once the CC are paid, you should put all that money towards the personal loan.  I do think you will have to have these all paid off to stand a chance.  When these are paid off, your DTI should be lowered (but on the high side of guidelines)... But, the higher FICO score and good credit history could give an underwriter reason to allow higher DTI.