by Maurie Backman | Dec. 3, 2020
Debt won't stop you getting a mortgage -- as long as you don't have more than you can handle.
Debt is common. Many consumers have credit card debt, an auto loan, or other form of debt.
If you're in debt and looking to buy a home, you may be wondering whether your debt will hurt your chances of getting a mortgage. The good news: You can get a home loan while already carrying debt. However, whether you qualify will depend on several factors related to that debt.
And remember, buying a house isn't some all-important milestone you need to reach by a certain age or season of life. It's okay if you decide to wait a couple years to pay down debt, raise your credit score, or get a better job before buying a house. Everyone's journey to home ownership is different, so decide to buy a house when it's the best decision for you and your family.
Here are some questions to ask before applying for a mortgage.
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One major factor that mortgage lenders look at when evaluating applicants is their debt-to-income ratio. This is the amount of debt you have relative to your income. The higher this number, the lower your chances of getting approved.
You can calculate your own debt-to-income ratio by dividing your debt by your income, then multiplying the decimal you get by 100.
Generally speaking, you won't get approved for a mortgage if your debt-to-income ratio is above 43% (if the number you got using the above equation is 43 or higher, it's too high).
If you're eager to buy a home soon but have an unfavorable debt-to-income ratio, your best bet is to pay off existing debt. (It's okay if that process takes a couple years.) If that's not possible, you can work on boosting your income or ask someone to be a co-borrower on your loan.
Another major factor in qualifying for a mortgage is your credit score.
If you regularly make your debt payments on time, you'll have a strong payment history. And that's the single most important factor in calculating your credit score.
On the other hand, if you’re constantly missing payments or paying your debt late, your credit score will take a hit (and you might not be ready to add a mortgage to your list of monthly payments).
There are many other reasons your credit score might not be perfect. Take a look at our guide to improving your credit score if you're ready for a mortgage and want to raise your score.
Being in debt won't automatically prevent you from getting a mortgage. But if you're already on the hook for other obligations, make sure you can really afford a mortgage -- as well as property taxes, homeowners insurance, and maintenance -- before attempting to buy a home. You can start by using our mortgage calculator to estimate your monthly mortgage payments. Then, decide whether those payments fit your current budget.
If too much of your income is eaten up by debt, you might struggle to keep up with your housing costs, putting you at risk of foreclosure. You may be better off paying down some of that debt and then applying for a mortgage when you're in a stronger financial position.
If you can't get a mortgage right now, don't worry -- you're not alone. There are plenty of others who are waiting for the right time to get a mortgage. Getting a mortgage when you're ready is always a better decision than rushing in when you're not.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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