When Applying For A Mortgage What Is Considered Debt?

Applying for a mortgage is the first step toward achieving your dream of owning a home. A major part of the mortgage process involves the lender assessing your financial health. Lenders carefully review your credit reports from the three major credit agencies, TransUnion®, Experian™, and Equifax®, to understand your ongoing financial obligations.

These reports show your outstanding monthly payments, such as loans, credit cards, alimony, and other major debts. Such outstanding monthly payments are considered debts. Lenders use this information to calculate your Debt-to-Income (DTI) ratio, which compares what you owe to what you earn. Typically, a DTI below 46% is preferred for mortgage consideration.

It is worth noting that NOT every debt appears on the credit report, but the main ones that affect your monthly financial obligations do.

Remember, your debt situation has a significant impact on whether your mortgage application will be approved and how much you may qualify to borrow.

Which Debts Show on the Credit Report?

1. Mortgage Payments & Rent

This is often your largest monthly expense. You may be paying rent or making monthly payments toward a primary mortgage, a second mortgage, or a home equity loan. All of these are included when calculating your monthly debt, especially those that will continue after you purchase your new home.

2. Child Support & Alimony

These ongoing payments are also considered by lenders, as they are likely to continue even after you secure a new mortgage.

3. Loan Payments

Most people have loans such as student loans, automobile loans, personal loans, “buy now, pay later” loans, home equity loans, and HELOCs.

4. Payments Toward Credit Card Bill

Recurring credit card payments are another debt that lenders consider. The total minimum payment is used to calculate your credit card debt. For example, if you have three credit cards with minimum payments of $100, $30, and $50, the lender will consider your total monthly credit card payment to be $180.

Debt-to-Income Ratio Calculation

The DTI ratio plays a key role in estimating your mortgage eligibility and how much a lender can offer you. For most lenders, a 36% DTI is generally acceptable. The maximum DTI that lenders in the U.S. typically allow is 43%.

How to calculate DTI:

• Calculate total (gross) monthly income: This is your income before taxes. Include payments from other sources, such as Social Security, alimony, disability benefits, and more.
• Calculate monthly debts: Include all debts, along with estimated monthly mortgage payments.
• DTI = Total monthly debts ÷ Gross monthly income
  

Example:

Suppose your gross monthly income is $10,000. Your monthly debts are $2,000, and your estimated monthly mortgage payment is $2,000. The total monthly debt would be $4,000.

DTI = Total monthly debts ÷ Gross monthly income

DTI = 4,000 ÷ 10,000 = 0.40 (40%)

Your DTI ratio is 40%.

Can the DTI ratio be reduced?

Yes. You can either increase your gross monthly income through part-time work or freelancing, or reduce some of your monthly debts, especially credit card obligations.

Can My Debts Affect My Mortgage Application?

Yes. Your DTI has a significant impact on whether you qualify for a mortgage and, if approved, the loan amount you may receive.

For example, if your DTI ratio is 50% or 70%, lenders are unlikely to approve your mortgage. A high DTI indicates that your debts are too high relative to your income, making it difficult to cover estimated mortgage payments.

Even if you do qualify with a high DTI, the lender may offer a lower loan amount to avoid overburdening you with additional debt.

On the other hand, if your DTI ratio is low, you may qualify for different types of loans and higher loan amounts. The terms of the loan may also be more favorable, as lenders see that you can comfortably manage the monthly payments.

What Types of Loans Can You Go For?

There are several types of mortgage loans available:

• Conventional Loans: Private lenders offer these loans.  They usually require an upfront down payment of at least 3 percent of the purchase price of the house. A high credit score, usually 740 or above, is generally required.

• VA Loans: These loans are backed by the Department of Veterans Affairs. These loans are designed for veterans, active military members, and their spouses or widows. Eligible applicants may qualify for zero down payment.

• USDA Loans: Supported by the U.S. Department of Agriculture, these loans need no down payment. To qualify, the home must be in a designated rural area of the state.

• FHA Loans: Insured by the Federal Housing Administration, these loans require a 3.5% down payment for applicants with a 580 credit score. Lower credit scores may require up to a 10% down payment.

• Jumbo Loans: These loans cover very high loan amounts, guaranteed by Freddie Mac and Fannie Mae. In 2025, loans over $806,500 require a jumbo loan. In high-cost areas like New York City or Los Angeles, loans exceeding $1,209,750 also fall into this category. Jumbo loans require a very high FICO score and additional lender-specific requirements.

FAQs

1. What debt can I have and still qualify for a mortgage?

Lenders determine this based on your overall financial health. Typically, your DTI ratio should not exceed 36% of your gross monthly income, though some loan providers accept up to 43%.

2. What debts are not included in the DTI ratio?

Monthly rent is usually excluded, as it ends once the mortgage is approved. Outstanding medical bills are also not counted. Other excluded items typically include cell phone bills, utilities, cable bills, and health or car insurance.

3. Which debts are included in the DTI ratio?

Lenders consider mortgage loans, credit card payments, alimony and child support, personal loans, auto loans, and student loans.

Conclusion

The debt-to-income (DTI) ratio is a main factor lenders use to determine the type and amount of mortgage you may qualify for. To secure the best deal, it’s important to maintain a low DTI ratio by either increasing your income or reducing your debts.

A lower DTI improves your chances of mortgage approval, helps you qualify for higher loan amounts, and may result in better loan terms. Understanding your DTI ratio is crucial for getting the right mortgage at the best rate.

Need help improving your DTI score and boosting your mortgage approval chances? Contact Total Mortgage today.