How does debt factor into the homebuying process?

Finances are highly personal, and it can feel overwhelming when you’re trying to buy a home and you suddenly have to share a lot of personal financial information. You might even feel judged or embarrassed to share your debt information with a potential lender. The average American is about $38,000 in debt, so you are certainly not alone if you enter the homebuying process with outstanding debt. But it’s important to understand your personal financial information in relation to your debt and how that will impact your homebuying process. 

How does debt impact my ability to buy a home?

Debt is one of the largest factors mortgage lenders consider when you apply for a home loan. Specifically, mortgage lenders will look at your debt-to-income ratio – or how much of your monthly income immediately goes toward paying down your existing debt. If you think about it, you consider your debt-to-income ratio every month when you make purchasing decisions. In your budget, you likely subtract your expenses (like debt repayment) from your income to determine how much money you can spend in a month. Your mortgage lender is doing this same process. 


The specific debt-to-income ratio your mortgage lender is looking for will vary. But generally, most lenders look for a debt to income ratio below 43%. Of course, a lower debt-to-income ratio is favorable to lenders because it means you are more likely to be able to cover the cost of your mortgage on a monthly basis without overextending yourself financially. 


Another way debt might impact your ability to buy a home is through your credit score. Your credit score is an easy way for financial institutions to see how reliable you are as a lender. Your credit score is built using a number of factors, but many of them are linked to debt. You can build your credit score by making your debt repayments on time every month, limiting outstanding debt on credit cards and reducing the number of debt accounts you have at one time. 

Is all debt the same to my mortgage lender?

Most common types of debt are considered equal to mortgage lenders. Things like autopayments, student loans, personal loans and credit cards are all factored into your debt-to-income ratio. But, it’s important to talk with your lender, as some debts might be treated differently depending upon your mortgage options. For example some lenders subtract alimony payments from your monthly income but don’t include it in your debt-to-income ratio. This can sometimes make it easier for you to qualify for a loan. 


There are a few things that you might consider debt that aren’t by your mortgage lender. Things like your monthly phone plan, gym memberships, or other subscription services are not counted as debt. It is still important to factor those costs into your monthly budget, though. 

How can I use information about my personal debt to make a smart homebuying choice?

Understanding your personal financial situation, including your outstanding debt, is important to help you make the best homebuying decision for your family. When you work with one of United Housing’s homebuying counselors, they can help walk you through that process. Some families might need to work on paying off debt and raising their credit for a year before starting the homebuying process. Other families need to closely monitor their budget to determine how large of a mortgage payment they can comfortably afford. Regardless of your situation, our team of well-trained experts will help you understand your financial situation and will guide you toward the decision and home that is right for you.

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