While affordability challenges lead some would-be homebuyers to opt out of even trying to qualify for a mortgage, others figure out a way to juggle their finances and make it work. The incentive to buy a home is more than just an emotional desire: According to Federal Reserve data, the average homeowner household has a net worth of $396,500, which is about 38 times the average renter household net worth of $10,410.
Still, the debt hurdle can be a tough one to jump. The average credit card debt per household is $11,507, according to WalletHub. In addition, about one in six people have student loans, with an average debt of $40,467, according to the Education Data Initiative.
But debt isn’t the only thing lenders review when determining how much you can borrow to buy a house. Even if you make monthly payments on loans and credit cards, it pays to discuss your situation with a lender.
“Lenders consider your overall financial profile, and on-time rent payments, stable employment, consistent income and responsible credit behavior can all support an approval decision,” says Justin Cotton, a senior home lending advisor with Chase Home Lending in Washington, D.C. “I suggest speaking with a home lending advisor early in the process for guidance on how these factors can be leveraged to build a strong loan application, especially if you’re concerned that other aspects of your financial profile aren’t as strong.”
If you’ve been paying a high rent, that shows that you’ve already been able to manage a housing payment, says Melissa Zaske, a loan officer with Cornerstone Home Lending, a division of Cornerstone Capital Bank in Edmond, Okla.
“A history of paying your bills on time also helps build a stronger credit profile, which may lead to better loan terms,” Zaske says. “Add in a steady job and you’ve created a trifecta of positive factors that can strengthen your mortgage application.”
Those positive factors may not completely overcome an overload of debt, but a discussion with a loan officer can shine a light on a pathway to a future home purchase.
One of the biggest misconceptions is “I have too much debt to buy a house,” Zaske says.
“The truth is that I don’t look at how much debt you have,” she says. “I look at whether your monthly payment obligation for your debt fits within the means of your income.”
Lenders calculate your debt-to-income (DTI) ratio, which compares your major monthly debt obligations to your total gross monthly income, to gauge how comfortably you would be able to manage a monthly mortgage payment, Cotton says. To calculate your DTI, add up all your minimum monthly debt payments (housing, student loans, credit cards, auto and personal loans, lines of credit and any child support/alimony), then divide that by your gross monthly income before taxes.
“Generally, a DTI under 36% is viewed as strong,” Cotton says. “A higher DTI may limit your loan options, and a lender may ask you to make a larger down payment or get a co-borrower. Qualifying for a loan with a DTI above 50% is typically more difficult, though guidelines vary by loan type and vendor.”
Every loan program and lender has different requirements and many borrowers qualify for a loan with DTI ratio in the 40% to 50% range, Zaske says.
Generally, both student loans and credit card debt can affect your ability to qualify for a loan, since both influence your credit history and your DTI, Cotton explains.
“To put yourself in a strong position for approval, stay current on at least the minimum payments and work on paying down high balances to lower your overall debt,” he says. “It’s important to understand your student loan details, including the loan type, balance and repayment plan. Even if your student loan is in deferment or forbearance, lenders may still factor in a future monthly payment when reviewing your application.”
One advantage of student loans is that they are one of the more flexible types of debt, Zaske says.
“Depending on the loan program, we may be able to use a calculated payment rather than the full balance,” she says. “There are also special loan programs for certain professions, like doctors and nurses, that can provide additional paths to becoming a homeowner even with education debt.”
One reason to consult a lender early is their ability to “build a roadmap” to future homeownership, Cotton says.
“Common focus areas include reducing credit card balances, avoiding new debt and large purchases, making payments on time and building an emergency fund so unexpected expenses don’t derail progress,” he says. “Potential strategies to strengthen eligibility include paying down high-interest balances, consolidating debt into more manageable payments, and paying off smaller balances to meaningfully reduce DTI.”
A good lender can help prospective buyers create a budget, improve their credit and develop a debt paydown strategy, Zaske says.
“I’ve also reviewed bank statements with clients to identify spending habits to find little ways to save each month,” she says. “Sometimes it’s as simple as redirecting a few recurring treats, like buying coffee every morning, and putting that money toward paying down debt or increasing savings. Small, consistent changes make a big difference over time. The goal is to not only make homeownership possible but to also make it sustainable.
Zaske suggests looking at your bank statements to highlight recurring expenses and pick one or two things you can either temporarily or permanently cut back on.
“Then talk to your lender about where those funds should go, like eliminating a
large payment or savings,” she says. “It all depends on your unique financial picture.”
Restructuring debt is worth considering, but it’s best to have professional help from a mortgage lender or financial advisor to develop a strategy, Zaske says.
“I’ve worked with borrowers who used balance transfers, paid off or down specific accounts, or even renegotiated loan terms to lower their monthly payments,” she says. “Sometimes consolidating debt can also make sense.”
“It’s important to note that not every option helps every borrower. The goal is always to improve your financial picture, oftentimes by lowering your DTI ratio,” Zaske says. “Before you move money around or pay off debt, I would advise speaking to a lender first because the last thing you want to do is pay off the wrong debt when another strategy would have had a bigger and better impact.”
Multiple loan programs make homeownership more accessible, including low down payment loans and down payment assistance programs that are accessible to people even if they have some debt.
“It’s important to take the cost of waiting into consideration,” Zaske says. “Waiting could cost someone the opportunity to begin building equity and home prices could increase, making it cost more to buy a home down the road. It’s always possible to refinance into your dream borrowing terms later or use your equity as a steppingstone towards a different home goal.”
Zaske recommends mapping out your housing budget and short-and-long-term goals with a lender, then comparing your options for buying now or waiting a year or two.
Cotton says some borrowers may be tempted to accept paying a higher interest rate for a loan with flexible credit guidelines. He believes it may be better to take the time to pay down debt before buying.
“Whether a higher-rate option is ‘worth it’ depends on the full picture, including your comfort with monthly payments, total costs and how long you plan to stay in the home,” Cotton says. “A good next step is comparing multiple scenarios with a home lending advisor to select a loan with terms that will best support your long-term financial health and stability.”
Rent-to-Own Option
While working out a financial strategy to qualify for a mortgage, some renters choose a rent-to-own arrangement with their landlord.
“Rent-to-own can provide time to improve credit, reduce debt and save for a down payment, sometimes with part of the rent credited toward the purchase,” Cotton says. “The key caveat is the contract. Ensure that you understand pricing, fees and what happens if you find you’re not in a financial position to buy at the end of the agreement term. Higher monthly rent payments can also make it harder to save for a down payment, so the numbers need to work.”
Zaske suggests contacting a real estate attorney to help you understand the terms of the agreement, particularly what happens if your plans change or you have a late payment. It’s important to talk to a lender to understand other options in addition to a rent-to-own agreement.
“I always want to reassure future homeowners that you cannot assume you’re disqualified for a home because you have debt,” Zaske says. “Someone with student loans, a car payment and a couple of credit cards may still qualify if those payments are manageable based on their income.”
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