Liabilities on mortgage application
Quick insights
- Loan providers may assess your existing liabilities to help determine how much mortgage you could reasonably afford without stretching your budget.
- Some loans and debt obligations may carry more weight in the underwriting process compared to other debts.
- Your debt-to-income ratio plays a major role in whether you qualify for a loan and what loan amount or mortgage interest rate you may receive.
Applying for a home loan can feel like navigating a financial maze, especially when it comes to liabilities since they can affect your chances of obtaining approval. Whether you’re managing student loans, tackling car payments or paying down credit card balances, your existing debt plays a crucial role in the mortgage approval process. While each loan provider may weigh liabilities differently, understanding how they’re evaluated can help you prepare a more complete—and potentially more successful—mortgage application.
What debt is considered when applying for a mortgage?
When you apply for a mortgage, loan providers often take a close look at your current financial obligations. This usually includes any recurring debts that may impact your ability to repay a home loan. Although the specific criteria may vary by lender or loan type, the following liabilities are typically reviewed by the mortgage officer:
- Credit card payments (including minimum required monthly payments)
- Auto loans and leases
- Student loans (even if deferred, depending on the loan program)
- Personal loans
- Existing mortgage or rent obligations
- Child support and alimony payments
- Installment loans or buy-now-pay-later accounts
- Home equity lines of credit (HELOCs)
How to calculate your debt-to-income ratio
Your debt-to-income (DTI) ratio is one of the main metrics loan providers typically use to evaluate your overall financial profile. This number compares your total monthly debt payments to your gross monthly income and helps mortgage lenders gauge how much additional debt you may be able to take on. To calculate your DTI ratio, follow the steps below:
- Add up all of your monthly debt payments. This could include items such as student loan payments, your car loan, minimum credit card payments and any other recurring liabilities.
- Divide this total by your gross (pre-tax) monthly income.
- Multiply the result by 100 to get your DTI percentage.
Example:
If your total monthly debts equal $2,000 and your gross monthly income is $6,000:
- $2,000 divided by $6,000 equals 0.33.
- 0.33 multiplied by 100 equals a 33% DTI.
What is a good DTI?
There is no single “perfect” DTI ratio, but many loan providers prefer to see a ratio below a certain threshold. Most loan providers prefer to see a debt-to-income (DTI) ratio below 36% because it suggests you have a stronger ability to manage monthly mortgage payments. Some lenders may approve a DTI as high as 40%-50% if you have strong compensating factors, such as an excellent credit score or substantial cash reserves.
What is not considered a debt for your DTI?
Not all financial obligations are factored into your debt-to-income ratio. Certain expenses may not be considered in the calculation because they’re either discretionary or not contractually required on a regular basis. These may include:
- Monthly utility bills (electricity, water, internet, etc.)
- Groceries and household expenses
- Streaming subscriptions or memberships
- Cell phone plans (unless financed through a carrier credit program)
- Transportation costs like gas, rideshare or monthly public transit fare
While these expenses still affect your overall personal budget, they usually aren’t included in the formal DTI calculation.
How lenders evaluate liabilities
When assessing your home loan application, mortgage lenders often look beyond just the total amount of debt. They may consider the type, structure and risk level of your debt obligations in various ways:
- Debt-to-income ratio calculation: Mortgage lenders calculate your DTI by dividing your total monthly debt payments by your gross monthly income. This ratio can offer greater insight into your financial flexibility and money management skills.
- Credit score considerations: Your credit score may reflect how well you’ve managed your liabilities in the past. A higher credit score could possibly offset higher debt levels in some cases.
- Loan underwriting process: During the underwriting process, the nature of your liabilities may be weighed differently. For instance, long-term student loans with low interest rates might not be viewed as negatively as short-term, high-interest debts like credit cards.
- Exceptions and mitigations: In certain situations, loan providers might make exceptions. If you have substantial savings, additional income sources or assets that help demonstrate financial stability, the lender may be a little more flexible.
In summary
Understanding how liabilities impact your home loan application can help you take a more informed and strategic approach to the homebuying process. While every loan provider evaluates debt differently, keeping your DTI in check (ideally 36%) and maintaining a strong credit history may improve your chances of qualifying.
