Lenders will use your monthly debt totals when calculating your debt-to-income (DTI) ratio, a key figure that determines not only whether you qualify for a mortgage but how large that loan can be.
This ratio measures how much of your gross monthly income is eaten up by your monthly debts. Most mortgage lenders want your monthly debts to equal no more than 43% of your gross monthly income.
To calculate your debt-to-income ratio, first determine your gross monthly income. This is your monthly income before taxes are taken out. It can include your salary, disability payments, Social Security payments, alimony payments and other payments that come in each month.
Then determine your monthly debts, including your estimated new mortgage payment. Divide these debts into your gross monthly income to calculate your DTI.
Here’s an example: Say your gross monthly income is $7,000. Say you also have $1,000 in monthly debts, made up mostly of required credit card payments, a personal loan payment and an auto loan payment. You are applying for a mortgage that will come with an estimated monthly payment of $2,000. This means that lenders will consider your monthly debts to equal $3,000.
Divide that $3,000 into $7,000, and you come up with a DTI just slightly more than 42%.
You can lower your DTI by either increasing your gross monthly income or paying down your debts.
How Can Your Debt Affect Getting A Mortgage?
If your DTI ratio is too high, lenders might hesitate to provide you with a mortgage loan. They’ll worry that you won’t have enough income to pay monthly on your debts, boosting the odds that you’ll fall behind on your mortgage payments.
A high DTI also means that if you do quality for one of the many types of mortgages available, you’ll qualify for a lower loan amount. Again, this is because lenders don’t want to overburden you with too much debt.
If your DTI ratio is low, though, you’ll increase your chances of qualifying for a variety of loan types. The lower your DTI ratio, the better your chances of landing the best possible mortgage.
This includes:
- Conventional loans: Loans originated by private mortgage lenders. You might be able to qualify for a conventional loan that requires a down payment of just 3% of your home’s final purchase price. If you want the lowest possible interest rate, you’ll need a strong credit score, usually 740 or higher.
- FHA loans: These loans are insured by the Federal Housing Administration. If your FICO® credit score is at least 580, you’ll need a down payment of just 3.5% of your home’s final purchase price when you take out an FHA loan.
- VA loans: These loans, insured by the U.S. Department of Veterans Affairs, are available to members or veterans of the U.S. Military or to their widowed spouses who have not remarried. These loans require no down payments at all.
- USDA loans: These loans, insured by the U.S. Department of Agriculture, also require no down payment. USDA loans are not available to all buyers, though. You’ll need to buy a home in a part of the country that the USDA considers rural. Rocket Mortgage® does not offer USDA loans.
- Jumbo loans: A jumbo loan, as its name suggests, is a big one, one for an amount too high to be guaranteed by Fannie Mae or Freddie Mac. In most parts of the country in 2024, you'll need to apply for a jumbo loan if you are borrowing more than $766,550. In high-cost areas of the country -- such as Los Angeles and New York City -- you'll need a jumbo loan if you are borrowing more than $1,149,825. You'll need a strong FICO® credit score to qualify for one of these loans.
FAQs
This includes the payments you make each month on auto loans, student loans, home equity loans and personal loans. Basically, any loan that requires you to make a monthly payment is considered part of your debt when you are applying for a mortgage.
What debt is considered when buying a home? ›
So do credit cards, even if you always pay the balance in full. You may notice slight variations between different lenders' calculations of DTI, but generally, these amounts are considered debt: Monthly housing costs, including a mortgage, insurance, homeowners' association fees and property taxes.
What debts are included in a mortgage application? ›
Add up your monthly debt payments: Factor in all of your debt obligations, including rent and house payments, personal loans, auto loans, child support or alimony, student loans and credit card payments. If you're applying with someone else, combine both of your monthly debts.
How much debt can I have and still get a mortgage? ›
As a general guideline, 43% is the highest DTI ratio a borrower can have and still get qualified for a mortgage. Ideally, lenders prefer a debt-to-income ratio lower than 36%, with no more than 28%–35% of that debt going toward servicing a mortgage. 1 The maximum DTI ratio varies from lender to lender.
Does having debt affect getting a mortgage? ›
The good news is that debt doesn't automatically bar you from getting a mortgage. However, the amount of money mortgage lenders will be willing to lend you, and the stipulations the money comes with, will depend on the type of debt you owe, the amount of it, and how you got it.
Do I need to pay off debt before buying a house? ›
You don't need to be completely clear of debt to be in good standing for a mortgage, in fact some debt can be good. If you're looking to get approved for a mortgage, you should be aware of the good and bad kinds of debt you currently have.
What is too much debt for a mortgage? ›
Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment.
What is counted as debt? ›
Debt can involve real property, money, services, or other consideration. In corporate finance, debt is more narrowly defined as money raised through the issuance of bonds. A loan is a form of debt but, more specifically, an agreement in which one party lends money to another.
Do mortgage lenders look at total debt? ›
They want to make sure you have enough money to pay back the loan even if you lose your job. Liabilities. Lenders will consider any outstanding debts such as credit cards, car loans, child support or student loans you may have. Your assets and liabilities are used when calculating your debt-to-income ratio.
What is monthly debt considered? ›
Add up your monthly bills which may include: Monthly rent or house payment. Monthly alimony or child support payments. Student, auto, and other monthly loan payments.
You can consolidate debt in a mortgage re-fi and point the home equity cash towards credit card debt. But like everything else, there are pros and cons to doing so. Take a look at our advice on what you need to know on refinancing your home to pay off debt.
What is included in debt-to-income? ›
Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow. Different loan products and lenders will have different DTI limits.
Can I buy a house with debt in collections? ›
Any negative mark on your credit can impact your score and reduce your chances of qualifying for a mortgage. This is especially true if you have debts that are late (past due), charged off, or currently in collections. But the reporting of these derogatory accounts doesn't disqualify you from getting a mortgage.
What is considered a lot of debt when buying a house? ›
Most mortgage lenders want your monthly debts to equal no more than 43% of your gross monthly income.
Should I pay off debt before mortgage? ›
If you'd like to buy a home, carrying credit card debt doesn't have to keep you from fulfilling your dream. But paying down the debt will lower your debt-to-income ratio (DTI) and could strengthen your credit score. That, in turn, will help you qualify for a home loan and potentially score you a lower interest rate.
How much credit card debt is acceptable? ›
The general rule of thumb is that you shouldn't spend more than 10 percent of your take-home income on credit card debt.
What is a form of debt used to buy a house? ›
Mortgages. These debt instruments are used to finance the purchase real estate—a piece land, a home, or a commercial property. Mortgages are amortized over a certain period of time, allowing the borrower to make payments until the loan is paid off.
What is considered household debt? ›
Debt is calculated as the sum of the following liability categories: loans (primarily mortgage loans and consumer credit) and other accounts payable. The indicator is measured as a percentage of net household disposable income.
Is buying a home considered bad debt? ›
The truth is, not all debt is bad. Some forms of debt can be beneficial – the prime example being a mortgage loan. If the reality of long-term debt is causing you to reevaluate your decision to purchase a home, take a deep breath, keep scrolling and learn more about the positive qualities of a mortgage loan!
