Can You Get a Mortgage If You Have Debt?

It is a common concern whether existing debt can prevent someone from obtaining a mortgage. Having debt does not automatically disqualify an individual from securing a home loan. Mortgage lenders evaluate an applicant’s financial situation to determine their ability to manage additional financial obligations.

Lender Assessment of Your Debt

Mortgage lenders primarily use a metric called the Debt-to-Income (DTI) ratio to evaluate how existing debt impacts a borrower’s capacity to take on a mortgage. This ratio compares an applicant’s total monthly debt payments to their gross monthly income. A lower DTI ratio indicates a greater ability to manage additional debt, making an applicant appear less risky to lenders.

Lenders consider two main DTI ratios. The “front-end” DTI ratio focuses on housing-related expenses, including the proposed mortgage payment, property taxes, homeowners insurance, and any homeowners association fees. The more comprehensive “back-end” DTI ratio includes all monthly debt obligations, such as housing costs, credit card minimum payments, auto loans, and student loans. Lenders prefer a back-end DTI ratio of 36% or below, though some loan programs, like Federal Housing Administration (FHA) loans, allow higher ratios, up to 45% or 50% in certain cases.

To calculate the back-end DTI, a lender sums all minimum monthly debt payments and divides that total by the borrower’s gross monthly income, which is income before taxes and deductions. For example, if a borrower has $1,500 in total monthly debt payments and a gross monthly income of $5,000, their DTI ratio would be 30% ($1,500 / $5,000). The minimum monthly payments for all recurring debts are factored into this calculation, regardless of the total outstanding balance.

A high DTI suggests a significant portion of income is already allocated to existing debts, which could limit funds for a new mortgage payment. Maintaining a DTI within acceptable ranges is a step toward mortgage approval.

The Role of Your Credit History

Beyond the Debt-to-Income ratio, a borrower’s credit history and credit score play an important part in a mortgage lender’s evaluation. A credit score summarizes an individual’s creditworthiness, indicating how reliably they have managed financial obligations. Lenders use this score to assess loan risk, with higher scores leading to more favorable mortgage terms and interest rates.

Debt, particularly revolving debt like credit cards, and payment history on all accounts, directly influence credit scores. Payment history, which accounts for 35% of a FICO score, reflects whether bills have been paid on time. Amounts owed, also known as credit utilization, make up 30% of the score and measure debt used compared to available credit. Maintaining low balances on credit accounts positively impacts this component.

Lenders review credit reports to understand an applicant’s repayment behavior, reliability, and past financial commitments. The report provides information on the length of credit history, which contributes 15% to the score, and the mix of credit types used, accounting for 10%. Most mortgage lenders use FICO scores, considering specific versions from the three major credit bureaus. For single borrower applications, lenders use the median of the three scores obtained. For co-borrowers, the lower middle score is considered.

A strong credit history can provide compensating factors for a slightly higher DTI ratio, demonstrating a consistent ability to manage debt despite a higher proportion of income allocated to it. For instance, a credit score of at least 620 is required for a conventional mortgage, while FHA loans accept scores as low as 500 or 580 with specific down payment requirements.

Impact of Different Debt Types

Student loans are included in DTI calculations, even if currently in deferment or forbearance. For conventional loans, lenders calculate a hypothetical monthly payment as 1% of the outstanding loan balance if no payment is reported. For FHA loans, the actual income-driven repayment (IDR) amount is used if greater than zero, or 0.5% of the loan balance otherwise. Some loan programs exempt deferred student loans for more than 12 months, such as certain VA loans.

Credit card debt is treated as revolving debt, and lenders factor in the minimum monthly payment when calculating DTI. High credit card utilization, which is the amount of credit used compared to the credit limit, can negatively affect a credit score and signal increased risk to lenders. High balances can hinder approval by increasing the DTI or indicating potential financial strain.

Auto loans are installment debts with fixed monthly payments included in the DTI calculation. A significant auto loan payment can impact the DTI, reducing the mortgage amount for which an applicant qualifies. Sometimes, if an auto loan has fewer than 10 payments remaining, lenders exclude it from the DTI calculation.

Personal loans, like auto loans, are installment debts, and their fixed monthly payments are included in the DTI ratio. Taking out a new personal loan close to a mortgage application can increase the DTI and lower a credit score due to the new credit inquiry and account. However, a history of timely payments on a personal loan can demonstrate responsible credit management.

Other recurring financial obligations, such as child support or alimony payments, are considered. If an applicant makes these payments, they are counted as monthly debts in the DTI calculation. Conversely, if an applicant receives child support or alimony, these funds can be considered qualifying income, provided they are consistent, legally documented, and expected to continue for at least three years after mortgage closing.