Why Debt is a Critical Factor in Qualifying for a Mortgage

by Steve CookJanuary 14, 2016

The two top reasons prospective first-time buyers are turned down for a mortgage today are either that they have too much debt or their credit is not good enough. Since debt is a major factor in determining your credit score, it might be argued that getting your debt situation in order should be your top priority.

Mortgage lenders are very concerned with the amount of debt you have for obvious reasons. If you currently have a high level of debt in relation to your income, the last thing you should do is take out a mortgage loan that will increase your debt load. If your financial obligations are eating up too much of your monthly income, you might have difficulty making your monthly mortgage payments.


Lenders assess your monthly debt load by adding up all your debt payment obligations on a monthly basis—credit cards, revolving accounts, alimony, auto loans, personal loans, back taxes. Then they divide the total by your monthly income to create your debt-to-income ratio or DTI. DTI is expressed two ways: either “front end”, without your potential monthly mortgage payment added in, or “back end”—with the mortgage included. The median front end DTI for mortgages approved last fall was 25 percent front end and 39 percent back end. In other words, if your monthly debt payments are 25 percent or less of your monthly income before you apply for a mortgage, you should have no problem getting qualified as far as your debt is concerned.

The median DTIs for mortgages that were denied were 29 percent front end and 48 percent back end—or nearly half of monthly income.


Debt-to-income ratios may seem quite reasonable and not hard to achieve. However, debt also plays a role. The amounts you owe is the second most important factor in determining your score, accounting for 30 percent of the final number. If you owe a lot on your credit cards — and exceed the target minimum — it’s likely that your credit score will be negatively affected.

To maintain the correct ratio of credit-to-debt, you should never use more than 30 percent of your total available credit on any one credit card because charging more than 30 percent of your limit will cause your credit score to decrease.

Managing Debt

The mountains of student loan debt that plagues many young households is seriously impairing their ability to buy a home. A 2014 survey conducted by the National Association of Realtors found that among the 23 percent of first-time homebuyers who reported difficulties with saving for a down payment, over half (57 percent) cited student loans as a factor. Student loan debt has dramatically changed the game plan for an entire generation.

Yet even potential buyers living on a modest income can reduce the negative impact of student loan debt. Here are some steps to take.

    • Refinance your student loan. DTIs are based on monthly payment obligations. You can lower your monthly obligation by refinancing your debt with a low-interest personal loan. You might also be able to find a loan with a lower interest rate.
    • Reduce your consumer debt. If you can’t do much to reduce your monthly student loan payment, reduce your other consumer debt and live on a cash basis. If you can get your credit card obligations below 30 percent of the credit limit on every card, you will greatly improve your score. For every card account that you can pay off, you will reduce your monthly debt obligation.
    • Refinance your consumer debt. You can take out a low-interest personal loan and use it to pay off your high-interest credit cards, which will lower the amount of interest you will pay and stretch out your payments over a longer period of time.

Incremental improvements in reducing your debt load can make a big difference. An analysis of loanDepot data of 46,000 first-time home buyers from 2010 to 2014 shows, however, that — depending on their debt-to-income ratio — the average borrower with student debt needs to reduce the total monthly payments by only $150 to $300 to qualify for a mortgage. So don’t despair. If you can cut a couple of hundred dollars from your monthly debt bills, you can get a mortgage.

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About The Author
Steve Cook
Steve Cook is editor and co-publisher of Real Estate Economy Watch. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.