How much debt can you have to buy a house?

How much debt can you have to buy a house?

Lenders prefer your total debt, including mortgage, to be under 36 percent of your gross income when buying a home. In addition, your mortgage shouldn’t be greater than 28% of your gross income. You should evaluate your own budget to see how much debt you are comfortable taking on.

Imagine being able to buy a house, even if you have student loans. Owning your home can be a good financial move, even with debt.

You can buy a house, even if you have debt or bad credit.

Luckily for you, I’ll show you how to get a mortgage if you have debt. I’ll show you how much debt is acceptable or if you need to pay off debt before applying for a loan. You’ll be able to make a plan for getting your first home!

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Can I get a mortgage if I have debt?

You can still get a mortgage if you have debt, but the amount of debt will affect how much money you qualify to borrow. Most banks want to see your mortgage payment below 28% and total debt less than 36% of your gross income. 

For example, let’s assume you earn $60k per year. Your lender will try to keep your annual mortgage payment below $16,800 and total debt below $21,600.

However, you may have other debt, such as a car payment or student loans. Let’s assume your car payment is $500 per month ($6k annually) and your student loans are $300 per month ($3,600 annually). Your total annual debt without a mortgage payment is $9,600.

A lender is going to keep your total debt below 36% or you become a risk of not being able to repay. Therefore, you can qualify for a mortgage payment up to $12,000 annually ($1k per month).

You can always walk into a bank and ask to speak with a loan officer. The loan officer can help you understand your options that work with your finances. However, keep in mind, they will usually approve you for more than you can reasonably afford to borrow.

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How long do you have to be debt free to get a mortgage?

You do not have to be debt-free to get a mortgage. Banks may qualify you for a mortgage as long as you have good credit and a decent debt to income ratio. However, it may be a good idea to pay down debt before buying a house.

Can I buy a house after debt settlement?

You can buy a house during or after a debt settlement, but settling your debt will impact your credit score. At the very least, your credit score should be 620 before applying for a mortgage. Therefore, people with credit scores under 620 should focus on repairing credit.

Your credit score ranges between 300-850. Most loan options will require you to have a credit score between 580-620. Your chances of qualifying for a loan are much better with higher credit scores.

You should focus on building your credit score if it’s below 620. Increasing your credit score can be done by repaying debts and bills on time, paying debt off in full, and avoiding taking out too many lines of credit.

Can you buy a house if you have student loans?

Student loans are considered a form of debt and will count towards your debt-to-income ratio when buying a house. Therefore, you may qualify for a mortgage payment if your total debt, including mortgage, is less than 36 percent of your gross income.

Should you be debt free before buying a house?

You do not have to be debt free before buying a house, but doing so can improve credit scores and ease the burden of debt repayment. However, you should be aware that too much debt can make it difficult for you to pay your monthly expenses. Therefore, it is recommended that you create a budget to see if buying a house with debt is feasible.

Becoming debt free is a good way to boost your credit scores. Paying off your debt shows lenders that you’re financially responsible and can repay debts. As you can imagine, credit is an important factor for determining how much you’ll be able to borrow.

However, the problem most people get into is taking out a loan for more than they can reasonably afford. Credit unions will typically allow you to borrow more money than you should. 

Therefore, it’s important that you come up with a budget and see how much money you think you should borrow.

For example, let’s assume you create a budget and make $4,000 per month. Your monthly expenses are estimated to be around $3,000 per month. A bank may qualify you to take out a loan for $1,200 per month.

As you can see, you’d be increasing your monthly expenses by $1,200 for a total of $4,200. Now you are spending an extra $200 per month that you don’t have. You could try to reduce your other $3,000 worth of expenses, but this can be difficult.

You also have to consider the opportunity cost of investing. For every dollar you are repaying, it is one less dollar you can’t invest to build wealth.

How much debt is acceptable for a mortgage?

The debt to income ratio to buy a house requires your total debt to be less than 36% of your gross income. Your mortgage payment should be less than 28% of your gross income. However, just because a lender will let you take on 36% total debt does not mean you can afford that much with other living expenses.

How much debt is too much to buy a house?

A lender may deny giving you a loan if your total debt exceeds 36% of your total income. Someone earning a $50k salary can only have $18k worth of debt annually, including the mortgage payment. Therefore, the more money you wish to borrow for a house, the less debt you should have.

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Summary: How much debt can you have to get a mortgage?

As you can see, most lenders will allow you to take out a mortgage with a good credit score and debt to income ratio. A good credit score is typically considered to be above 620. Your total debt should be under 36 percent of your total income and mortgage payment under 28 percent.

You don’t have to be debt free to take out a mortgage, but it helps. Paying off debt is a good way to boost your credit score. Take on too much debt and you may find it difficult to pay for your monthly expenses.

Every situation is unique. Therefore, if you are seriously considering purchasing a home then you should talk to a loan officer. A loan officer can give you an idea of how much money you can borrow.

Keep in mind, a loan officer may tell you that you’re qualified to take on more debt than you should. Therefore, it’s important to have a budget in place to estimate how much money you can afford.

John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.