How Much Debt Can You Have to Get a Mortgage?

Securing a mortgage involves a thorough evaluation of a borrower’s financial health. Lenders assess income, credit history, and existing debt obligations to determine repayment capacity. The amount of debt directly influences the maximum mortgage amount and terms offered. Understanding how lenders view and calculate debt is a fundamental step for anyone considering homeownership.

Understanding Debt-to-Income Ratios

A primary tool lenders use to gauge a borrower’s ability to manage monthly payments and repay debts is the Debt-to-Income (DTI) ratio. This percentage compares total monthly debt payments to gross monthly income. A lower DTI indicates a reduced risk for lenders, suggesting more disposable income is available after covering debt obligations.

Lenders analyze two types of DTI ratios. The “front-end” DTI, also known as the housing expense ratio, focuses solely on housing-related costs. It is calculated by dividing projected total monthly housing expenses (including principal, interest, property taxes, homeowners insurance, and any homeowners association fees) by gross monthly income. An ideal front-end DTI is 28% or less.

The “back-end” DTI, or total DTI, provides a broader financial picture. This ratio includes all recurring monthly debt payments in addition to proposed monthly housing expenses, divided by gross monthly income.

For many conventional loans, lenders look for a back-end DTI of 36% or lower. However, some lenders may approve borrowers with a back-end DTI up to 43% or even 50% for certain loans like FHA loans, depending on the loan program and other compensating factors. To calculate your back-end DTI, sum all monthly debt payments and projected housing costs, then divide by gross monthly income and multiply by 100.

Types of Debt Considered by Lenders

When calculating your Debt-to-Income ratio, lenders include most recurring, legally binding monthly debt obligations. These payments appear on a credit report or are verifiable through official documentation. The focus is on minimum required payments, not total outstanding balances.

Credit card debt is factored into the DTI calculation using the minimum monthly payment due on each account. Lenders consider this recurring obligation even if a borrower pays more than the minimum. Student loan payments are also included, and even if loans are in deferment or forbearance, an imputed payment is often used, such as a percentage of the outstanding balance.

Monthly payments for auto loans and personal loans are fully included in the DTI calculation. Other obligations like alimony and child support payments are also factored in if legally required and ongoing for at least three years from the mortgage application date.

Conversely, certain regular expenses are not included in the DTI ratio because they are not considered recurring debt obligations. These include utility bills, cell phone bills, insurance premiums (unless part of a debt repayment plan), groceries, and other living expenses. The distinction lies in whether the payment is a fixed, legally enforceable debt or a variable, discretionary expense.

Additional Factors in Mortgage Eligibility

While debt levels are a significant component of mortgage qualification, lenders consider other factors to assess overall risk and repayment capacity. A borrower’s credit score plays an important role, reflecting their history of managing credit and influencing the interest rate offered. A higher credit score, above 670, indicates lower risk and can lead to more favorable loan terms, though minimum scores can range from 500 to 620 depending on the loan type.

The amount of a down payment also impacts mortgage eligibility. A larger down payment, representing a greater upfront investment in the home, reduces the loan amount needed and can signal stronger financial stability to lenders. Making a substantial down payment can sometimes offset other risk factors, such as a higher DTI, and may eliminate the need for private mortgage insurance.

Lenders also scrutinize income stability and employment history to ensure a consistent ability to make mortgage payments over time. They prefer to see a steady income source and at least two years of consistent employment with the same employer or in the same field.

A borrower’s assets and reserves provide an additional layer of financial security. Liquid assets, such as checking and savings accounts, investments, and retirement funds, demonstrate a financial buffer for unforeseen circumstances. While not always strictly required for primary residences, having several months’ worth of housing expenses in reserves can be a compensating factor, particularly for borrowers with lower credit scores or higher DTI ratios.