How does my debt affect qualifying for a mortgage?

A large portion of qualifying for a mortgage is based on what is called a “debt to income ratio”. The lender will look at your monthly debt obligations showing up on credit against your monthly gross income. Typically, you need to be below a 50% DTI (debt to income) ratio. Keep in mind, they will only count items that show up on credit as a monthly debt obligation. Things like auto insurance, monthly Amazon expenses, Netflix, Hulu, etc. do not get included in your DTI ratio.

For example:

$7,000/mo in gross income

$7,000/mo (gross income) * 50% = $3,500/mo (max allowable monthly debt obligation including new mortgage payment)

Student loans: With many student loans in forbearance, most lenders will use 1% of the total balance for your monthly obligation. For example, if you have $20,000 in student loans, your “monthly” payment for qualifying would be $200/mo. In some instances, you can use 1/2% of the balance versus 1%.

Credit cards: Any open revolving accounts will have a minimum payment included in your DTI ratio. If you pay your card off every single month, they will still include a minimum payment for qualifying (usually $25-$40/mo per card). Any cards with a balance, whatever the minimum payment is on the card, is what they use as your monthly payment for qualifying purposes.

Installment loans: With Installment loans, whatever the minimum payment is what will be used by underwriting for qualifying. Installment loans are things like auto loans, ATV loans, boat loans, etc. The total balance does not matter, only the minimum monthly payment.