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 is counted as debt? ›
Debt is anything owed by one person to another. 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.
Will debt stop me getting a mortgage? ›
So, having certain kinds of debt that you're handling well won't necessarily weaken your chances of getting a mortgage. (In fact, it could even work in your favour if it helps to boost your credit score.) On the other hand, a high level of debt that you're struggling to manage will make getting a mortgage trickier.
What debt is included in debt-to-income ratio for mortgage? ›
Types of DTI ratios
This includes the mortgage (if you get it) and other housing expenses, plus credit cards, auto loans, child support, student loans — the predictable, regularly recurring items. Living expenses, such as utilities, are not included, however.
Can you get approved for a house if you have debt? ›
Yes, you can qualify for a home loan and carry credit card debt at the same time.
What is not considered debt? ›
Liability includes all kinds of short-term and long term obligations. read more, as mentioned above, like accrued wages, income tax, etc. However, debt does not include all short term and long term obligations like wages and income tax. Only obligations that arise out of borrowing like bank loans, bonds payable.
Does credit card debt affect mortgage approval? ›
How does credit card debt affect getting a mortgage? Having credit card debt isn't going to stop you from qualifying for a mortgage unless your monthly credit card payments are so high that your debt-to-income (DTI) ratio is above what lenders allow.
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.
Should I pay off debt before applying for a mortgage? ›
Should you pay off a credit card before applying for a mortgage? "It does make sense to pay credit cards down or pay them off, then apply for a mortgage when your score is as high as possible," Mendoza said. By decreasing your credit utilization ratio, you use less of your available credit.
Can you lump debt into mortgage? ›
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.
Standards and guidelines vary, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.
What is considered monthly debt? ›
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. Credit card monthly payments (use the minimum payment)
What is too high for debt-to-income ratio? ›
Key takeaways
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
Is it better to have a loan or credit card debt for a mortgage? ›
That depends on the circ*mstances surrounding the debt and whether clearing the debt would wipe out your savings. The interest rate charged on most credit cards is typically much greater than that of savings accounts or mortgage products, so it could be cheaper to repay the debt before acquiring further debt.
What is not included in the debt-to-income ratio? ›
Many of your monthly bills aren't included in your debt-to-income ratio because they're not debts. These typically include common household expenses such as: Utilities (garbage, electricity, cell phone/landline, gas, water) Cable and internet.
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 payments are considered debt? ›
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.
Is a phone bill considered debt? ›
To calculate your DTI, you add up all your monthly debt and then you divide it by your gross monthly income. Make sure to leave out those monthly living expenses like your phone bill and utilities.
Do bills count as debt? ›
Not every bill you pay gets counted toward your debts. Typically, the only things that show up are items you get a loan or a credit account for. The easiest way to think about this is that if it shows up on your credit report, it can be included in your DTI.
Does a house count as debt? ›
These are some examples of payments included in debt-to-income: Monthly mortgage payments (or rent) Monthly expense for real estate taxes. Monthly expense for home owner's insurance.
