Most homebuyers apply for a mortgage while carrying other debts: a car payment, student loans, a credit card or two. That is normal. What matters to a lender is how those debts show up on your credit report, how large the monthly payments are, and how they combine with the new housing payment. Each type of debt is treated a little differently, and the details depend on the loan program.
How lenders look at debt overall
Lenders review your credit report for payment history and add up the required monthly payments on your debts. Those payments, plus the proposed mortgage payment, are compared with your gross monthly income to produce your debt-to-income ratio. Higher payments leave less room for the mortgage, which can lower the amount you qualify for or change which programs fit.
Student loans
Student loans are counted even if they are in deferment or forbearance. When the credit report shows a monthly payment, lenders often use it. When the payment shows as zero or the loan is deferred, each program has its own method for calculating a payment to count, and those methods differ between conventional, FHA, VA and USDA loans. If you are on an income-driven repayment plan, have your current payment documentation ready, and ask lenders how their programs treat it.
Auto loans and leases
Car loan payments count toward your ratio. Some programs allow an installment loan that is close to being paid off to be excluded, but rules vary and leases are generally counted because they usually renew or are replaced. The biggest risk is timing: buying a car shortly before or during the mortgage process adds a new payment and a new inquiry, and can change your approval. Wait until after closing if you can.
Credit cards
For revolving accounts, lenders use the minimum payment shown on your credit report, even if you pay the balance in full every month. High balances also raise your credit utilization, which can lower your score. Paying balances down before you apply can help both measures. Keep the accounts open unless your loan officer advises otherwise.
Co-signed and authorized-user accounts
If you co-signed a loan for someone else, that debt generally counts against you, because you are legally responsible for it. Some programs allow it to be excluded if you can document that the other person has made the payments for a sustained period. Authorized-user accounts are treated differently by different underwriting systems, so mention them to your lender.
Collections, charge-offs and judgments
Unpaid collections and charge-offs do not always prevent approval, but lenders may require that some be paid or that you explain them, and court judgments and tax liens typically must be resolved. If you are working through past-due accounts, ask a lender which items need attention before you start paying, because paying the wrong account first may not improve your file.
Getting ready
- Pull your credit reports and list every debt with its balance and monthly payment.
- Check that the payments on your report match your statements.
- Bring student loan statements showing your current repayment plan.
- Pay down card balances where you can without draining the cash you need for closing.
- Avoid new debt, new accounts and large purchases on credit until after closing.
Bottom line
Existing debt does not rule out a mortgage, but it shapes how much you can borrow. Know how each type of debt is counted, keep your balances and payments documented, and hold off on new credit until your home loan has closed.
This article is general information, not legal, insurance, tax or lending advice. Rules and lender requirements change, so confirm details with your lender, the relevant Texas agency or a licensed professional.