When you’re looking to purchase a home through the mortgage application process, your lender will likely inquire about the types of debt you hold. However, according to experts, not all debts carry equal weight — and having debt doesn’t necessarily hinder your ability to buy a house.
How Lenders Evaluate Your Debt
Creditors review your credit history.
Nicole Rueth, a mortgage expert based in Denver, emphasized that mortgage providers place significant importance on your credit report.
“We’re really zooming in on the specific items listed in the credit report,” Rueth said.
Your credit report contains details about your credit lines and debt history — such as how many credit cards you have, how long you’ve had them, your credit limits, and your current balances. It also includes any loans you’ve taken out, such as mortgages, car payments, or installment loans.
Bankruptcies and previous credit checks also appear on your credit report.
Debt-to-Income Ratio (DTI)
Keep an eye on your debt-to-income (DTI) ratio.
When lenders assess your credit report, they also evaluate your DTI — the percentage of your monthly income that goes toward paying debts like credit cards, car loans, and other recurring expenses.
“We examine the estimated housing costs, including loan principal and interest, taxes, and insurance,” explained Jennifer Beeston, a mortgage lender based in Florida. “Additionally, we review your overall credit history.”
Lenders typically care more about your monthly debt payments than the total amount of debt. Rueth suggests aiming for a DTI around 50%, meaning you should ideally spend no more than half your monthly income on debt-related expenses.
Improving Your Credit Score
Lenders also consider your credit score, though it’s a different metric from your DTI.
Rueth notes that most lenders look for a minimum credit score of 500 or higher to qualify for a mortgage.
Rueth advises speaking with a loan officer about your specific situation before assuming you can’t qualify. Credit score requirements and interpretations can vary depending on the loan product and lender.
How to Boost Your Credit Score
To raise your credit score, Rueth recommends demonstrating that you can handle debt responsibly. This includes:
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Keeping credit card accounts open and active
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Making all payments on time
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Keeping balances below 30% of your credit limit on any single card
“Being able to handle debt and make timely payments is an achievement,” Rueth said.
It’s also helpful to have a diverse mix of debts — such as a credit card, a student loan, and a car loan — to demonstrate financial responsibility across different types of credit.
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