Too much debt to qualify for a loan.

Mortgage and Lending with Opportunity Mortgage NMLS# 175844

Too much debt to qualify for a loanToo much debt to qualify for a loan

Many home loan applicants think about their debt in relation to income when trying to purchase a home  but don't know how much debt is too much for qualification.  Every home loan applicant is evaluated to see  how much debt in relation to income they have.  When there is too much debt I often hear:  Help! I have too much debt to qualify for a loan what should I do?  

  To determine a person's debt to income ratio three forms of debt are considered.  It is evaluated in terms of monthly income and monthly payments.  The types of loan payments that are included in this calculation are mortgage, installment, and revolving loans.   Mortgage loans are monthly house payment(s).  Installment loans are car loans, student loans, and personal loans. Lastly, revolving credit would be anything that doesn't have a set pay off plan like credit cards and personal lines of credit.  Typically cable, utility, and cell phone bills do not count against a borrower in the debt  to income calculation for qualification. 

Loan guidelines have become more strict in the various programs on how much debt to income is allowed.  Generally, a total debt to income ratio limit looks reasonable at 45%. However, in some cases a borrower can still borrow up to 50% and 55% of their income.  This is why it is key to get prequalified by a lender before getting too excited about purchasing a home. 

 If a borrower qualifies at a 50% maximum debt to income ratio an example would be; a borrower makes $3000 before taxes in monthly income.  Their monthly mortgage payment including property tax and homeowner's insurance, car loans, and credit cards, cannot exceed more than $1500 per month.  Subsequently, if the requirement is no more than 45% then you would take $3000 x .45 = $1350 in total maximum payments per month. 

If a borrower is trying to qualify for a loan to buy a house and the debt to income ratio is too high they have to think of a way to reduce their overall monthly payments.  A radical change may have to happen to their financial situation and/or philosophy before they can even think of purchasing a house.   Every individual and/or family has to start from somewhere.  There needs to be a plan.

  What is your plan for paying off debt?  In my next post I will present some ideas on what needs to go into a debt reduction plan that you can manage yourself for free. 







Too much debt to qualify for a loan





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Comments (8)

Adrian Willanger
206 909-7536 - Seattle, WA
Profit from my two decades of experience

Elisha-thanks for clarifying what the debt to income ratios look like. I remember before all the problems started we had the front end and back end ratios, which I'm sure is still use, I prefer a simple format. Best. 

Jul 12, 2011 07:40 AM
Evelina Tsigelnitskaya
SIB Realty - Sunny Isles Beach, FL

Yes, Elisha, will follow your post to learn more.

Thank you.

Jul 12, 2011 10:27 AM
Elisha Grace
Opportunity Mortgage - Bozeman, MT
Bozeman Montana Loan Officer

Hi Adrian,

This is my first "real" blog post and I appreciate your comment. You are right that the "front end" ratio still applies.  Usually, the top end ratio throws the loan off for applicants who have no other debt and want to spend all of their income on a house payment. It is best to run the numbers through automated underwriting to see how high a borrower can go up to.  If there are other compensating factors, the top end ratio can be pretty high.  I simplified the post to let readers understand how a lot of debt can affect them for pre-approval.    Thanks and have a great day! 

Jul 13, 2011 05:09 AM
Elisha Grace
Opportunity Mortgage - Bozeman, MT
Bozeman Montana Loan Officer

Hi Evelina,

Thanks for following my blog.  I appreciate readers as I am just starting out.  Have a great day!!


Jul 13, 2011 05:14 AM
Norma Toering Broker for Palos Verdes and Beach Cities
Charlemagne International Properties - Rancho Palos Verdes, CA
Palos Verdes Luxury Homes in L.A.

Elisha - Consumers are in need of this information before they begin to search for a home.  It can take months (maybe even years) to pay down debt and become eligible for a loan.  I have several clients leasing while they work on improving their credit so they purchase a home.

Jul 13, 2011 11:40 AM
Elisha Grace
Opportunity Mortgage - Bozeman, MT
Bozeman Montana Loan Officer

Norma - I agree with you.  I have had applilcants who closed a couple of years after I initially took their application.  If it is a goal for people to purchase a home they have to start from where they currently are and create a plan to get there.  Sometimes it can be a really small change that makes a huge difference.  Thanks for leaving a comment. 

Jul 13, 2011 12:54 PM
EC, JF, Double R and Zoey the Cool Cat
Russel Ray Photos - San Diego, CA

It’s also important to have some debt. Don’t let mom and dad pay for everything even though they might love you and want to, and you love them and want them to!

Jul 21, 2011 03:28 PM
Elisha Grace
Opportunity Mortgage - Bozeman, MT
Bozeman Montana Loan Officer

Hi Eric,  I agree with you about not letting mom and dad pay for everything. This year I read a book called "The Millionaire Next Door" and it addressed the dangers of paying for everything for your kids.  He writes about how it can become a type of "income" for the receivers. They become dependent on this type of "income" and never learn to become self sufficient enough to build their own wealth thereby doing more harm than good.    If you can get through the writing style it is an interesting book.  Thanks for the comment.

Jul 21, 2011 04:23 PM