How Much Debt Can I Have and Still Get a Mortgage Loan?

This is part of an ongoing series that addresses frequently asked questions from home buyers. Today’s question is: How much debt can you have and still get a mortgage loan?

The short answer: Debt-to-income ratios, as they are known within the mortgage industry, can vary from one loan program to the next. But these days, most lenders set the bar somewhere around 43% to 50%. That means that if your combined monthly debts (including the mortgage payment) exceed 50% of your income, you might have trouble qualifying for a mortgage loan. But those aren’t hard and fast rules.

How Much Debt Is Too Much for a Mortgage Loan?

When measuring the debt level of a borrower, mortgage lenders view it in relation to the borrower’s income. This is aptly referred to as the debt-to-income ratio, or “DTI” for short.

They are actually two of these ratios, within the context of mortgage loans:

  • The front-end debt ratio only looks at your housing-related costs in relation to your income. It’s a comparison between (A) your mortgage payments and other housing costs, and (B) your gross monthly income.
  • The back-end DTI ratio considers all of your recurring monthly debts, including your mortgage payment, credit cards, car payments, etc. This one tends to have a bigger impact on your ability to qualify for a mortgage loan.

So, how much debt can you have and still get a home loan? Most lenders today set the limit somewhere between 43% and 50% for the back-end or total DTI ratio. So, if you would end up spending more than half of your monthly income to cover your various debts – after taking on the new loan – you might have trouble qualifying for mortgage financing.

Similar “Rules” for FHA and Conventional Loans

Here’s a look at how much debt you can have for different mortgage programs:

Rules for FHA Loans

The Federal Housing Administration (FHA) home loan program says that borrowers should generally have a total debt-to-income ratio no greater than 43% for most borrowers. But it also goes on to include a list of “compensating factors” that could allow lenders to approve borrowers with higher debt levels.

For example, if the new loan would only result in a minimal increase in the borrower’s housing costs, then a debt ratio above 43% might be allowed. The same goes for borrowers with excellent credit and cash reserves in the bank. In some cases, home buyers using an FHA loan can have up to 50% debt to income. The table, taken from HUD Handbook 4000.1, explains it in more detail:

FHA compensating factors

Rules for Conventional Loans

A conventional mortgage loans is one that is not insured by the government, which sets it apart from FHA. Conventional loans used to have a maximum debt-to-income ratio somewhere around 43% to 45%. But in July 2017, Fannie Mae announced that it would allow debt ratios up to 50%.

Fannie Mae and Freddie Mac are the two government-sponsored enterprises that buy mortgage loans from lenders, in order to keep the market moving. They now both allow DTI limits up to 50%. This means it is now easier to qualify for a mortgage loan with existing debt.

Credit Scores, Ability to Repay, and Other Factors

So that explains how much debt you can have and still qualify for a mortgage loan. Keep in mind there are other factors that determine loan approval as well. Credit scores are one of them. You’ll also need to have sufficient income to repay your loan obligation.

We wrote about current credit score trends in a recent blog post. These days, lenders generally prefer borrowers to have scores of 600 or higher to qualify for a mortgage loan. These requirements can vary from one loan program to another, though, and also from one lender to another. So these numbers are certainly not written in stone.

But recent statistics show that most closed home loans today have credit scores of 600 or higher. There is a relatively small percentage of close loans with scores below that mark, but the vast majority had scores of 600 or higher. So that gives us some insight into where the trend line is in 2017.

Your ability to repay is another key requirement when applying for a mortgage. And it relates back to the first question, how much debt can you have and still get a mortgage loan? We talked about the debt-to-income ratio above. This is basically a way for lenders to assess your ability to repay your loan, in light of all your other existing debts.

Mortgage underwriting and approval is a “big-picture” process. Lenders and underwriters look at a variety of factors to determine whether or not a person is a good candidate for a home loan. The amount of debt you have is certainly important, and that alone could determine whether or not you qualify for a mortgage. But there are other considerations as well.