Expert Q&A

How to shrink debt-to-income ratio while on Social Security


A reader on Social Security wants to improve her debt-to-income ratio in order to qualify for a home loan. Can it be done?

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Question for the expert

Dear Credit Score Report,
How can I reduce my debt-to-income ratio quickly? It’s 56 percent, and I need to lose at least 20 percent so that I can qualify for a home loan. I’m retired, on Social Security of $605 per month. Any help? — Marji


Answer for the expert

Hey Marji,
Unfortunately, unless you win the lottery or a wealthy relative cuts you a check, there probably aren’t quick fixes for reducing your debt while on a limited income. However, if you’re willing to put in the time and effort, you may be able to lower your debt-to-income ratio in order to eventually qualify for a mortgage.

To get your debt-to-income ratio under control, you’ll need to repay your existing loans aggressively. “The fastest way is to pay more than the minimum amount due each month. However, the reader mentions that she’s on a fixed income, so paying more may not be possible for her,” says Laura Creamer, a financial education specialist with nonprofit credit counseling agency CredAbility. Based on your financial situation, it’s important to be realistic: If your budget is already stretched to the limit, buying a new home anytime soon may be impossible. In that case, Creamer says you may want to contact an organization such as Habitat for Humanity, which may help with affordable housing. But by looking at each side of that debt-to-income seesaw, you may be able to tip the balance in favor of increasing your income while simultaneously lowering your debt.

Let’s start with your income. Because you receive Social Security, you may be limited in how much additional income you can earn. As the Social Security website explains, “You can get Social Security retirement or survivor’s benefits and work at the same time. But if you are younger than full retirement age and earn more than certain amounts, your benefits will be reduced.” In other words, depending on your age, you may need to calculate whether working is worth it, if working causes Social Security income to fall. Of course, if you’ve already reached full retirement age, these issues shouldn’t concern you.

Once you’ve decided it makes financial sense to take a job, don’t assume the only option is greeting shoppers at the local Walmart. For some career ideas, check out the AARP website, which has a section on working after retirement. You may also want to try a less-formal way to earn cash, such as selling unused clothes, appliances or furniture. You can also free up some cash by cutting your expenses, such as eliminating cable TV or other nonessential costs.

Adjusting the other half of your debt-to-income ratio — the debt part — requires making larger payments to your lenders. Paying them only the minimum monthly amount just won’t cut it. Once you increase your income and cut your expenses, you can send more frequent and larger payments to your creditors. I’d also recommend calling your lenders directly to explain your financial situation and ask whether they can lower your interest rates. If they agree, your monthly payments will do more to lower your principal — the original loan amount — which will speed repayment.

You can also get some help from a credit counseling agency. A debt management plan from an accredited agency “will enable her to receive lower interest rates and monthly payments, but her mortgage lender may view this negatively before a home purchase,” Creamer says. With a debt management plan, you’ll work with an agency to set up a three- to five-year program for repaying lenders. However, such a plan could make you look more risky to any potential lenders, so proceed with caution.

In the end, your goal of qualifying for a home loan will be possible only if you increase your earnings, decrease your debt or, ideally, both. Once you purchase a new home, you’ll need to make sure you still have enough money to cover mortgage payments, home repairs, taxes and other house-related expenses. In other words, securing a home loan doesn’t mean your financial problems are over. If you’re not careful, they may just be getting started.

Good luck!

— Jeremy

See related:The pros and cons of debt management plans, Your options for reducing a high credit card APR

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