How to Qualify for a Mortgage with Debt

Many people think that it is impossible to buy a house if you have debt. That is simply not true! Everyone has debt! It’s the type and amount of debt you have that will influence mortgage qualification.

When it comes to personal debt and getting a mortgage, the main considerations are:

• How much debt do you have in comparison to your income?
• How much money do you want to borrow (for the purchase of your home)?

Typically, a debt-to-income ratio as high as 45% (including your home purchase) is acceptable by lenders, while the lower the DTI ratio, the better. In some circumstances, borrowers can have a higher DTI ratio than 45%.

Debts also affect mortgage qualification through your credit score and credit profile. A car loan, for instance, will not negatively impact your credit score if your payments are made on time. On the other hand, debts that have gone to collections will significantly harm your credit score and may prevent you from getting a mortgage.

One of the most common types of debt that we see is student loan debt. Every situation is different, but generally, if you are paying your student loans (and all other factors are in good health) they will not necessarily prevent you from obtaining a mortgage.

 

Types of Debt & Related Situations that Could Prevent You from Getting a Mortgage

For a full guide on qualifying for a home loan after financial hardship, read our complete guide.

Foreclosures

Most borrowers cannot obtain a mortgage for at least 2 years after the date of the sheriff sale. Some programs may require additional time since the foreclosure, and time to re-build and re-establish healthy credit.

Bankruptcies

In general, borrowers cannot obtain a mortgage for at least 2 years after bankruptcydischarge date so long as a house was not involved in the bankruptcy. If a house was involved, the minimum time is 3 years after the date of the sheriff sale and bankruptcy discharge. Some loan programs may require additional time since the bankruptcy, and many programs require re-established credit to qualify.

Late Mortgage Payments

If in the past year, a borrower has made a late payment on their mortgage, it may be more difficult to obtain a mortgage. Certain compensating factors may allow for special exemption, subject on a review of your finances.

Unpaid Judgments

Borrowers cannot typically qualify for a mortgage if they have unpaid judgments against them on which they have not started paying.

 

Qualifying for a home mortgage with student loans

One thing many young working professionals have in common is student loans. We get the question almost daily: “Can I still qualify for a mortgage if I have student loan debt?”

Short Answer: Yes. You may still qualify for a mortgage even if you have student loans/debt.

Think of student loan debt the same as you would any other debt when applying for a mortgage. As long as you have been diligently making your payments, it should not disqualify you from buying a home. Student loan debt does influence how much “mortgage” you might qualify for. Your total amount of (monthly) debt is factored against your gross monthly income and becomes your “DTI” or debt-to-income ratio.

Here are top 4 things to consider for people with student loan debt who want to qualify for a mortgage to purchase a home.

1. Check with us to ensure that you debt to income ratio is healthy.
2. Your student loans may have come out of deferment without your knowledge. If this has happened, you may have late payments on your credit you will need to address and resolve. Treadstone’s Loan Officers can check your credit to ensure this hasn’t happened.
3. Your lender can tell you if your student loan debt will even count against you based on the status of your student loan, your estimated closing date, and the type of mortgageyou wish to qualify for.
4. If you have multiple student loans, it may help to consolidate all of them into one lower monthly payment. While this option may improve your DTI ratio, it is not a one-size-fits-all option.

 

Start the home buying process!

Whether you want to purchase a house now or in the future, always talk to a licensed Loan Officer to explore how debt will affect your loan eligibility. Treadstone Funding is a local mortgage company in West Michigan and has helped countless borrowers who have student loan debt. Connect with a Pro to see what you might qualify to borrow, and get one step closer to purchasing your next home.

**Terms and qualification are subject to underwriting approval and can change without notice.  Not all borrowers may qualify.  Credit score and down payment examples are for illustrative purposes.