If you plan to buy a home with a mortgage, your lender will want to know what kind of debt you have. But some things are more important than others, experts say, and even if you have debt, you can still buy a house.
Here's how:
Lenders look at your credit report
Mortgage lenders care most about what's in your credit report, according to Nicole Rueth, a residential lender in Denver.
"We're hyper-focusing on that credit that's on the credit report," Rueth said.
That report includes breakdowns of your lines of credit and debt. For example, your mortgage lender can see how many credit cards you have, how long those cards have been open, the credit limit on each, and how much credit you're using, among other things.
They can also see other loans you have taken out, such as other mortgages, car payments and installment loans.
Your credit report will also list any bankruptcies or past credit inquiries, but medical debt may not always appear.
Be mindful of your monthly debt-to-income ratio
By looking at your credit report, lenders calculate your debt-to-income, or DTI, ratio. That's the difference between your gross monthly income and how much you're spending on recurring payments, like your credit card or car loan, as reflected on your credit report.
"We're looking at the projected housing payment, principal, interest, taxes, insurance and if there's" a home owners association fee, said Jennifer Beeston, a mortgage lender in Florida. "Then we're also looking at your credit report."
Beeston said lenders don't necessarily consider the total amount of your debt, but rather what you owe each month. So, if you owe $100,000 in student debt, your lender may not penalize you for carrying such a hefty loan if the monthly payment is manageable.
A good rule of thumb is to keep your DTI-ratio around 50%, according to Rueth. You should be putting about half of your monthly income toward payments on your credit report.
Ultimately, though, that ratio depends on the borrower and the type of loan. For example, if you have a low credit score, your lender could require a lower ratio. On the other hand, a first-time homebuyer may have more flexibility, and lenders could accept a DTI up to 57%, according to Rueth.
You can raise your credit score
Lenders also consider your credit score.
Like a DTI-ratio, there isn't a one-size-fits-all credit score for borrowers, but you can be too low to qualify for a mortgage, according to Rueth. Usually, you'll need to be above at least 500.
"A credit score of 670 to 739 is considered good.," Experian.com advises. "Credit scores of 740 and above are very good, while 800 and higher are excellent."
Rueth said credit scores can be judged differently depending on your situation, so you should still consult with a loan officer about your options before you rule out the possibility of owning a home.
One of the best ways to bolster your score is by showing that you can manage debt, she said. Some ways to do that include holding more than one credit card, keeping your credit cards open, paying your bills on time and not spending more than 30% of your credit limit on each card.
"Showing that you can carry debt, you can manage debt, and you can pay debt is a huge win," she said.
You should be strategic about paying off your debt. It's good to show that you can hold and manage those payments. It can also be helpful to have various kinds of debt: a credit card, a student loan and a car payment, for example.