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Debt Consolidation & DTI

I can't get a consolidation loan because of too much revolving debt-to-income ratio. Can anyone help?

I can't get a consolidation loan because of too much revolving debt-to-income ratio. I'm not behind or late on any payments, but I'm not getting ahead either. We almost have to use our credit cards to live. Our credit history even shows we pay our bills religiously. We refinanced our house 4 years ago and not much equity built up. My wife works 1 job and I have 2. We have 3 kids, mortgage and 2 car payments, as well as loans and credit cards. Can anyone help?

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Bill's Answer
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Updated: Oct 21, 2014

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Highlights

  • Look into using your home equity to consolidate debt.
  • Work to improve your credit score, if it is a barrier to your being approved for a consolidation loan.
  • Consider a debt management program, if you don't qualify for a loan.

There are several solutions to your problem, but which option is the best for you will depend on how old the debts are, if you own property, and how much money you can afford to allocate to your debts on a monthly basis. If you follow the links below, I can put you in contact with a company that may be able to assist you in resolving these debts.

If you want a free debt consultation with one of Bill's approved debt help partners, see the Bills.com debt help savings center.

Debt Consolidation Loan

If you own a home, a secured debt consolidation loan may be right for you. This type of loan is essentially a home equity loan which is used to pay off your other creditors. Secured consolidation loans help many consumers by consolidating all of their debts into a single monthly payment with a lower interest rate and payment amount.

Also, be careful before you borrow money against your home to pay off credit cards and other unsecured loans; you will be converting what was previously unsecured debt into secured debt. This could cause you problems down the road if for some reason you are unable to make your payments, or if life circumstances force you to file bankruptcy, as you may not be able to discharge the secured debt as you would unsecured debt. However, secured debt consolidation loans work for many people, so this is an option to consider carefully. The Bills.com Savings Center is a great resource to help you find a lender for this type of loan.

Bills.com makes it easy to compare mortgage offers and different loan types. Visit the Bills.com free mortgage refinance quote page for details.

Another option is to seek an unsecured loan from your bank or a local credit union. It generally requires excellent credit to qualify for an unsecured loan. If you are turned down, find out why. If it is related to your credit score, take a look at your credit report.  You can take steps to improve your credit score and qualify later.

Some loans are secured against your assets, such as your car. The interest rate for this kind of loan is usually slightly higher than a home loan, but it is certainly less than you pay on most credit cards. Look for a loan with no prepayment penalty, so you can pay it off faster as your financial situation improves.

Credit Counseling

Another option to consider is a Consumer Credit Counseling Service, or CCCS. CCCS companies offer numerous services, such as financial counseling and budget planning, as well as Debt Management Plans (DMPs). In a DMP, the CCCS would arrange a new payment amount with each of your creditors, usually based on a reduced interest rate. You would then make a single monthly payment to the CCCS which would distribute the funds to your creditors, based on the new payment amounts. There are several drawbacks to CCCS, though.

First, depending on your creditors, it may not be able to reduce your monthly payments enough to improve your financial situation. Second, it may have a negative impact on your ability to obtain a loan, so you may not wish to enter into a DMP if you anticipate any large purchases, such as home or an auto, in the near future. Third, the average DMP takes around five years to pay off your debts, so you must be willing and able to commit to a long-term repayment plan.

Debt Settlement

You may also want to consider the services offered by debt settlement firms. Rather than making monthly payments to your creditors, these programs negotiate lump sum settlements with your creditors, frequently reducing your debts by 50% to 60% of your principal balances. These programs usually take only 2-3 years to complete, so this is a good option for many people to rid themselves of debt in a relatively speedy manner. In many cases they can also reduce your monthly payment toward your debt. There is one major drawback to debt settlement programs, though they will significantly damage your credit while in the program and for at least a year or two afterward. However, if you are currently unable to afford to pay your creditors, the hit to your credit may be worth the benefit of ridding yourself of credit card debt.

Because of your financial difficulties, you may want to stop focusing on the importance of your credit score. Although you may have a good credit score, because of your low income and large debt amount, most lenders will likely see you as a high risk borrower, and may not be willing to extend you credit, so your actual credit rating may not good as you believe. A debt settlement program is probably the fastest way to resolve you debts, and once you repay your debts, you should be able to rebuild your credit score through careful management of your credit accounts.

Hopefully, one of the several options I have described above may be able to help you. I encourage you to explore the Bills.com Debt Help page to read more about these and other options available to you.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

VIDEO: Debt Consolidation - What is Debt Consolidation?

20 Comments

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  • GS
    Oct, 2013
    Georgette
    Have a credit score of 725. All credit ratio at 45% of income. Applied for home mortgage of $250,000 and the house was appraised at $298,000. In 2009, I had three credit card companies I had settled with for least amount than I owed because I lost my job. After appraisal of home, I was turned down for a refinance and they would not tell me why. Can you? How can I get the negative credit cards off my credit score? Or, do I need to?
    0 Votes

    • BA
      Oct, 2013
      Bill
      The lender should have told you the reason you were turned down. Call them and ask to speak with a supervisor to learn why the lender's underwriting team rejected your loan application. If the rejection was due to your credit score, under the FCRA, the lender is obligated to tell you that, share the score it received, and the name(s) of the consumer credit reporting agency — Equifax, Experian, TransUnion, or another — that supplied your credit report information.

      It does not appear this is credit score related. The settlements should not be an issue. The greatest credit-harm you suffered on those accounts was when you went severely delinquent, prior to settling them. At this point, they are not likely the cause of the problem. They will fall off your credit report 7 years from the date when you first went delinquent (not the date of settlement).

      Speak with another lender and don't pay for another appraisal without learning if you meet the second lender's requirements.
      0 Votes

  • WC
    Jan, 2011
    William
    I am currently looking for a Debt Consolidation Loan im in danger of losing my security clearance in the Military. Im in about $20,000 of debt thats just an estimate. As a military member i have limited sources of help i can look into you. My bills range from previous rent to maxed out credit cards. Basically if i dont find some way to fix the financial crisis that im in, i may have no choice but to file for Bankruptcy at the age of 26 and 6 yrs in the military. If i do so i will kicked out. Any suggestions or help?
    0 Votes

    • BA
      Jan, 2011
      Bill
      William, your options to consolidate your debt are very limited, based on the facts you presented. A lender is going to judge you ability to repay a loan by examining your debt-to-income ratio, your credit score, and your credit history. The debts you described sound like they will have hurt your credit score to the point that you won't be approved for an unsecured loan.

      If you have a car that has any equity in it, look into getting an 'auto title loan.' An auto title loan uses your vehicle as collateral. Because the lender could take possession of your car, if you default on the loan, the credit requirements to be approved for an auto title loan are far less strict than for an unsecured loan.

      Another possible solution is to see if someone who knows and loves you is willing to co-sign on a loan for you or to lend you the money on his or her own. I generally advise people NOT to become a co-signer, because the co-signer can be held fully responsible for the debt, if you were to default on it. Still, given the grave consequences that you described should your situation deteriorate into bankruptcy, I wanted to mention co-signing to you.

      Lastly, have you spoken with the JAG office? I don't know if they can help you, but I have heard that they are quite helpful, in general.
      0 Votes

    • WC
      Jan, 2011
      William
      Actually there is no one who could or would be willing to lend me a hand in this matter, and JAG could be an option when it finally comes down to being a legal matter. I do in fact already have a Auto Loan with about 14 grand left on the Loan. But im not sure if I understand what i can do with that. If you could explain to me i would appreciate it greatly.
      0 Votes

    • BA
      Jan, 2011
      Bill
      I think you are at the point where your debts are a legal matter. First, let me say I am the furthest thing from an expert on military security classifications, so I cannot comment on either of your statements regarding losing your security classification if you file for bankruptcy, or if you will be discharged for filing bankruptcy. I was unclear before when I suggested you consult with a JAG or other lawyer who practices military law regarding those two issues. With the tremendous downturn in the economy, I would imagine (but have no evidence of what I am about to say) the military has become somewhat more flexible about any rules it has regarding debts and qualifying for security clearances. Again, a lawyer practicing military law will give you the precise advice you need.

      Second, regarding your debts, if they are causing you distress, then you need to resolve them either with something like debt settlement or, as you mentioned, bankruptcy. Before you commit yourself to either, study the potential downsides of each and whether either will have an impact on your career. As mentioned above, that is where consulting with a military law expert comes in.
      0 Votes

  • 35x35
    Sep, 2010
    Sonya
    I am commenting on the last comment made in 3/10. I can totally relate with the gentleman referring to great credit, no late payments and a high debt to income ratio. We are also facing the same problem. Our credit score is 790.. we have 3 houses with mortgages, 2 of which are income producers. But because we have a high debit ratio the banks will not allow us to lower our monthly payments. We could be saving ourselves approx. $1,000 per month if the bank would refi just one of our homes. I understand your answer Bill.. but the whole thing doesn't make sense. It's like a catch 22. How can a bank say.. your ratio's are to high. We can't do a refi and lower your monthly payments by x amount of dollars. Instead, we want you to continue struggling with all the debt you have, but yet can afford on a monthly basis. WTF.. Obviously if someone can afford to pay their current bills on time every month, they would continue if that cost was cut in half. It seems to me that there has to be a loop hole somewhere to get around this. At this point I feel that the banks look at us with the high to deit ratio and great credit scores and say.. Why would we give you a loan which would lesson the amount you pay to US a month? You pay your bills now.. so why will I lower that and make less money. If anyone out there knows of a way around us supporting the banks.. please reply.
    0 Votes

  • BA
    Mar, 2010
    Bill
    You already know the answer to your question, but I will reply anyway. Lenders want three things in a perfect debtor: Stable income; Strong credit history; Low debt-to-income ratio. You have the first two. The lender is frightened by your DTI.
    0 Votes

  • 35x35
    Mar, 2010
    Katie
    The I am trying to get a home equity loan to pay off 350.00 a month in minimum credit card debt. I have plenty of home equity but my debt to income ratio is really high but I have great credit of 725. I have two mortgages (80/20) on my primary residence and one conventional mortgage on my rental property(I do make 300.00 a month profit on this though), along with an auto loan, credit card debt and student loans--all these backed up next to my income makes me have an awful debt to income ratio. However, what does not make sense to me is how the bank will not approve this loan. I have GREAT credit which obviously means that I am paying everything on time and have no outstanding debts. What is the difference of me keeping this debt and barely staying afloat then trading it over for one, MUCH lower payment a month? Certainly if I can pay 350 a month+ in bills and have a 725 score, then I can surely afford the 89.00 a month low monlthy payment from the bank isntead. What gives??
    0 Votes