What is Considered Debt When Applying for a Mortgage?

When applying for a mortgage, lenders evaluate your financial stability, one component of which is assessed based on the amount of debt you currently carry. Understanding what qualifies as debt and how it affects your mortgage application is crucial for anyone looking to secure a home loan.

How is Debt Assessed When Applying for a Mortgage?

Mortgage lenders assess your debt by calculating your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income that goes toward paying debts. This ratio helps lenders evaluate your ability to manage monthly payments and repay the loan without becoming financially overextended. The lower your DTI, the more favorable your mortgage application will look, as it suggests you have a manageable level of debt compared to your income.

What do Mortgage Lenders Consider Debt?

Essentially, debt is any amount of money you owe to creditors that you are required to repay over time, typically with interest. Mortgage lenders will look closely at the debts you carry when deciding whether to approve your loan application, as they want to ensure you can afford your monthly mortgage payments alongside your existing financial obligations. Below is a list of debts lenders will consider:

• Mortgage Payment (on an existing loan and/or the loan you are applying for)

• Credit Card Payments - Even a relatively small amount of credit card debt can significantly affect your DTI ratio, making it harder to qualify for a mortgage. Lower credit balances indicate better financial management and a lower risk of defaulting on your loan payment.

• Student Loan Payments - Whether or not student loans are in deferred status can influence how they are factored into your DTI. Loans that are in repayment are included in your DTI calculation. If your student loans are deferred (meaning payments are temporarily postponed), some lenders may not count the payments in your DTI calculation. In some cases, lenders may estimate what the future payments could be and factor that into your DTI.

• Car Loans - If you have a large car payment or multiple car loans, this can reduce your available income for a mortgage, making it more challenging to qualify for a loan or secure more favorable loan terms.

• Personal Loans - In general, lenders treat personal loans with caution because they can be an indication of broader financial challenges.
• Child Support/Alimony - Ongoing child support and alimony payments are considered legal obligations, and mortgage lenders factor these into the DTI calculation as well.

What is Not Considered Debt?

While mortgage lenders carefully review your debts to assess your ability to repay a loan, not every financial obligation you have is counted as debt when applying for a mortgage. Understanding what is not considered debt is just as important as knowing what is because these obligations won't affect your debt-to-income (DTI) ratio or your ability to qualify for a loan. Here's a breakdown of some common financial factors that are not considered debt in mortgage calculations:

• Utility Bills
• Rent Payments
• Contributions to Savings or Retirement Accounts
• Cell Phone Bill
• Car Insurance Premiums
• Groceries

While these obligations may not be considered debt or impact your ability to qualify for a mortgage, you should still factor them into your overall budget and living expenses, ensuring you can comfortably afford your mortgage note along with all of the other essential bills you must pay to live comfortably.

How do Lenders Calculate Debt-to-Income Ratio?

In this example, the DTI ratio is 54%, meaning that 54% of the applicant's gross income goes toward paying off monthly debts.

Mortgage lenders typically have specific thresholds for what they consider an acceptable DTI ratio when evaluating a loan application; however, the exact requirements can vary based on the type of loan and the lender's policies. By keeping your DTI ratio in a healthy range, you increase your chances of mortgage approval and may even secure more favorable loan terms, such as a lower interest rate. For over a century, Standard Mortgage has been helping homebuyers navigate the complexities of the mortgage process with ease and confidence. Let us put our trusted legacy and commitment to service to work for you—because at Standard Mortgage, we don’t just approve loans; we help build futures.