Do you have to be debt free to buy a house?
Not necessarily, but you can expect lenders to take into consideration how much debt you have and what kind it is. Considering a solution that might reduce your payments or lower your interest rate could improve your chances of getting the home loan you want.
Most lenders cap the DTI ratio at 50%. You likely won't qualify for a loan if your DTI is over 50%. It may raise a red flag for lenders, even if it's just under the maximum. If you have a high DTI or think your bills are hard enough to manage now, consider paying down your debt.
If you have a monthly income of $4,000, and your typical monthly debt payments are $1,500, your DTI ratio is 37.5% ($1,500 divided by $4,000). Mortgage lenders want to see a debt-to-income (DTI) ratio of 43% or less. Anything above that could lead to the rejection of your application.
This means your total monthly debts, including your prospective mortgage and any other debts like car payments or credit card bills, shouldn't exceed 43% of your monthly income.
In some cases, especially if your current credit score makes it difficult for you to get a mortgage loan, it's a good idea to pay down credit card debt. But keep in mind that credit card debt isn't the only factor in getting mortgage approval.
Monitor your credit
Your credit report will include your credit history in terms of how long you've managed credit, your total debts, and your rate of repayment — all factors reviewed by mortgage lenders. Beyond getting your initial credit report, be sure to stay on top of your credit score.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts.
As a general guideline, 43% is the highest DTI ratio a borrower can have and still get qualified for a mortgage. Ideally, lenders prefer a debt-to-income ratio lower than 36%, with no more than 28%-35% of that debt going towards servicing a mortgage. 1 The maximum DTI ratio varies from lender to lender.
You should aim to keep housing expenses below 28% of your monthly gross income. If you have additional debts, your housing expenses and those debts should not exceed 36% of your monthly gross income. Your max purchase budget is the loan amount that lenders could probably give you based on what you've told us.
The general rule of thumb is that you shouldn't spend more than 10 percent of your take-home income on credit card debt.
What is the 50 30 20 rule?
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Credello: Studies show that Millennials often have debt. The average amount is almost $30K. Some have more, while others have less, but it's a sobering number. There are actions you can take if you're a Millennial and you're carrying this much debt.
Ideally, financial experts like to see a DTI of no more than 15 to 20 percent of your net income. For example, a family with a $250 car payment and $100 of monthly credit card payments, and $2,500 net income per month would have a DTI of 14 percent ($350/$2,500 = 0.14 or 14%).
This is your monthly debt payments (all of them) divided by your gross monthly income. It's one of the key number lenders will use to determine your ability to manage your monthly payments. A 45% debt ratio is about the highest ratio you can have and still qualify for a mortgage.
You can do your debt-free scream after you've paid off all your debt (with the exception of your mortgage). Some people hold off until they've paid for their house too, but you definitely don't have to wait until you reach that point.
Consider your bigger financial values
Financial experts agree that you should generally invest your extra cash rather than accelerate paying off low-interest debt, but still some people place immeasurable value on being debt-free or owning a debt-free home.
Federal Housing Administration (FHA) loans need at least a 580 FICO Score with at least a 3.5% down payment (which amounts to $10,500 on a $300,000 home). Conventional loans require a minimum FICO® Score of 620 along with a 3% down payment (which amounts to $9,000 on a $300,000 home).
You'll typically need a credit score of 620 to finance a home purchase. However, some lenders may offer mortgage loans to borrowers with scores as low as 500. Whether you qualify for a specific loan type also depends on personal factors like your debt-to-income ratio (DTI), loan-to-value ratio (LTV) and income.
You'll usually need a credit score of at least 640 for the zero-down USDA loan program. VA loans with no money down usually require a minimum credit score of 580 to 620. Low-down-payment mortgages, including conforming loans and FHA loans, also require FICO scores of 580 to 620.
Generally, it's recommended to spend between 25% to 33% of your gross monthly income on housing. For a $70,000 salary, this translates to a monthly mortgage payment of approximately $1,450 to $2,000. However, the exact amount can vary based on your personal circ*mstances and the type of loan you choose.
What is the rule of 3 when buying a house?
If you really want to keep your personal finances easy to manage don't buy a house for more than three times(3X) your income. If your household income is $120,000 then you shouldn't be buying a house for more than a $360,000 list price.
A $100K salary allows for a $350K to $500K house, following the 28% rule. Monthly home expenses would be around $2,300 with a down payment of 5% to 20%. The affordability of the house will vary based on financial factors and credit scores.
You can consolidate debt in a mortgage re-fi and point the home equity cash towards credit card debt. But like everything else, there are pros and cons to doing so. Take a look at our advice on what you need to know on refinancing your home to pay off debt.
1) Add up the amount you pay each month for debt and recurring financial obligations (such as credit cards, car loans and leases, and student loans). Don't include your rental payment, or other monthly expenses that aren't debts (such as phone and electric bills).
On a salary of $36,000 per year, you can afford a house priced around $100,000-$110,000 with a monthly payment of just over $1,000. This assumes you have no other debts you're paying off, but also that you haven't been able to save much for a down payment.
References
- https://www.investopedia.com/terms/u/unlimited-liability.asp
- https://andersonadvisors.com/8-ways-limit-personal-liability-business-owner/
- https://www.equifax.com/personal/education/credit-cards/articles/-/learn/how-many-credit-cards-should-i-have/
- https://www.apartmentguide.com/blog/what-is-debt-to-income-ratio/
- https://www.atlanticbay.com/knowledge-center/7-tips-to-get-you-in-credit-worthy-shape-before-buying-a-house/
- https://www.collinsdictionary.com/us/dictionary/english/real-estate-liability
- https://legal-info.lawyers.com/bankruptcy/foreclosures/common-mortgage-servicing-error-failing-to-pay-your-escrowed-taxes-and-insurance.html
- https://www.amfam.com/resources/articles/money-matters/consolidate-debt-with-mortgage-refinance
- https://www.patriotsoftware.com/blog/accounting/liability-for-business-debts/
- https://www.cnet.com/personal-finance/banking/savings/should-i-save-money-or-pay-off-debt-first/
- https://www.procaresupport.com/procare-desktop/docs/credit-cards-journal-entries
- https://www.gwcu.org/faq/article/what-are-assets-and-liabilities
- https://www.freshbooks.com/en-ca/hub/accounting/types-of-liabilities
- https://www.incharge.org/financial-literacy/how-to-calculate-your-debt-to-income-ratio/
- https://www.helpwithmybank.gov/help-topics/mortgages-home-equity/payments-late-payments/mortgage-escrow-shortage.html
- https://stellarfi.com/answer/what-credit-score-is-needed-to-buy-a-300k-house
- https://www.unfcu.org/financial-wellness/50-30-20-rule/
- https://www.investopedia.com/ask/answer/07/mortgagepayments.asp
- https://www.creditguru.com/index.php/credit-management/commercial-credit-management-articles/79-what-are-the-4-cs-of-credit
- https://www.bostonherald.com/2023/03/14/the-average-millennial-has-nearly-30k-in-debt-here-is-what-they-should-do/
- https://bettermoneyhabits.bankofamerica.com/en/credit/what-is-debt-to-income-ratio
- https://www.rocketmortgage.com/learn/what-in-the-world-is-an-escrow-shortage
- https://www.nerdwallet.com/article/loans/personal-loans/calculate-debt-income-ratio
- https://www.figure.com/blog/is-your-home-an-asset-or-a-liability/
- https://www.nerdwallet.com/article/mortgages/debt-income-ratio-mortgage
- https://www.freshbooks.com/hub/accounting/assets-and-liabilities
- https://www.rocketmortgage.com/learn/is-buying-a-house-a-good-investment
- https://www.rocketmortgage.com/learn/pay-off-debt-or-save-for-house
- https://khatabook.com/blog/10-types-liabilities-in-accounting/
- https://www.cnbc.com/2024/03/07/states-highest-lowest-average-monthly-mortgages-doxo-report.html
- https://www.marketwatch.com/picks/i-have-20k-in-credit-card-debt-and-pay-400-a-month-just-in-interest-im-worried-about-this-large-sum-of-interest-im-paying-what-should-i-do-01675358619
- https://www.chase.com/personal/credit-cards/education/basics/what-is-debt-to-income-ratio-and-why-it-is-important
- https://www.quickenloans.com/learn/debt-to-income-ratio
- https://bluewatermtg.com/faq/middle-process-ive-told-debt-ratio-high-qualify-can-pay-credit-cards-better-qualify/
- https://www.cbsnews.com/news/how-to-pay-off-15000-in-credit-card-debt/
- https://www.insureon.com/blog/risk-management-threats-for-real-estate-agents
- https://www.britannica.com/money/account-receivable
- https://www.nolo.com/legal-encyclopedia/personally-liable-llc-corporate-debt-bankruptcy.html
- https://www.bankrate.com/finance/credit-cards/pay-off-credit-card-debt-before-applying-for-mortgage/
- https://www.fool.com/the-ascent/small-business/accounting/articles/types-of-liabilities/
- https://stairsfinancial.com/blog/how-much-house-can-i-afford-on-40k-a-year
- https://www.wellsfargo.com/goals-credit/smarter-credit/credit-101/debt-to-income-ratio/understanding-dti/
- https://www.forbes.com/advisor/mortgages/fha-loan-requirements/
- https://homework.study.com/explanation/is-rent-a-fixed-asset.html
- https://www.wolterskluwer.com/en/expert-insights/s-corp-vs-llc-differences-and-benefits
- https://www.rocketmortgage.com/learn/what-credit-score-is-needed-to-buy-a-house
- https://www.koho.ca/learn/zero-balance-on-credit-card/
- https://www.cnbc.com/select/paying-off-too-much-debt/
- https://wallethub.com/answers/cc/how-long-to-pay-off-20000-credit-card-debt-1000423-2140858500/
- https://www.uslendingcompany.com/blog/what-is-the-difference-between-an-asset-and-a-liability/
- https://www.nolo.com/legal-encyclopedia/limited-liability-protection-llcs-a-50-state-guide.html
- https://www.moneylion.com/learn/how-to-get-a-loan-with-high-debt-to-income-ratio/
- https://www.apartmenttherapy.com/mortgage-payment-increase-37244942
- https://www.allstate.com/resources/home-insurance/what-does-home-liability-cover
- https://www.investopedia.com/terms/g/generalpartnership.asp
- https://www.lendingtree.com/debt-consolidation/whats-a-good-debt-income-ratio/
- https://www.investopedia.com/terms/l/limitedliability.asp
- https://dreamhomefinancing.com/high-dti-mortgage-lenders/
- https://www.westernsouthern.com/personal-finance/how-much-debt-is-too-much-calculator
- https://1finance.co.in/blog/understanding-good-vs-bad-liabilities
- https://www.citizensbank.com/learning/how-much-debt-is-too-much.aspx
- https://brainly.in/question/56706290
- https://bettermoneyhabits.bankofamerica.com/en/home-ownership/mortgage-debt-to-income-ratio
- https://www.brightonescrow.com/what-should-i-pay-first-mortgage-or-escrow/
- https://www.consumerfinance.gov/ask-cfpb/will-paying-off-my-credit-card-balance-every-month-improve-my-score-en-1293/
- https://www.chase.com/personal/mortgage/education/financing-a-home/how-to-pay-down-your-principal
- https://www.cnbc.com/select/what-is-the-28-36-rule-for-buying-a-home/
- https://gocardless.com/guides/posts/unlimited-liability-definition-and-examples/
- https://www.rocketlawyer.com/real-estate/home-ownership/real-estate-financing/legal-guide/buying-a-house-when-you-have-significant-debt
- https://www.debt.org/bankruptcy/eliminating-debt-without-paying/
- https://files.consumerfinance.gov/f/documents/cfpb_your-money-your-goals_savings-asset-limits_tool_2018-11.pdf
- https://www.rockethomes.com/blog/home-buying/why-did-my-mortgage-go-up
- https://www.investopedia.com/terms/t/total-liabilities.asp
- https://www.goamplify.com/blog/homebuying/is-owning-a-home-an-asset-or-liability/
- https://www.investopedia.com/mortgage/mortgage-rates/fixed-versus-adjustable-rate/
- https://homework.study.com/explanation/why-does-it-take-30-years-to-pay-off-a-150-000-loan-even-though-you-pay-1-000-a-month.html
- https://www.businessinsider.com/real-estate-expert-home-liability-buying-property-fha-loan-2023-10
- https://extension.umn.edu/credit-and-debt/how-much-debt-too-much-debt
- https://www.nextinsurance.com/comparison/general-liability-vs-business-owners-policy/
- https://www.deshretcapital.com/classroom/credit-and-liability-risks
- https://themortgagereports.com/70827/70k-per-year-salary-how-much-house-can-i-afford
- https://www.moneygeek.com/mortgage/dti-calculator/
- https://www.shortform.com/blog/is-a-house-an-asset-or-a-liability/
- https://www.bench.co/blog/accounting/liabilities-in-accounting
- https://www.fidelitybank.com/resources/knowledge-center/calculator-how-much-will-i-save-by-increasing-my-mortgage-payment/
- https://www.accountingdepartment.com/blog/business-liabilities-explained
- https://www.bankrate.com/personal-finance/debt/how-to-calculate-debt-to-income-ratio/
- https://www.creditkarma.com/advice/i/fixed-interest-rate
- https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-en-1791/
- https://www.linkedin.com/pulse/how-much-house-can-you-afford-3-30-10-rule-habeeb-mahmood
- https://www.progressive.com/answers/liability-insurance/
- https://pacifichomeloans.com/how-to-improve-your-debt-to-income-ratio-dti/
- https://www.cbsnews.com/news/how-long-will-it-take-to-pay-off-5000-in-credit-card-debt/
- https://fmx.cpa.texas.gov/fmx/pubs/afrrptreq/cap_assets/index.php?section=categories&page=property
- https://www.josephthomas.us/investment-property-by-risk-level/
- https://thedarwiniandoctor.com/home-from-liability-to-asset/
- https://www.bankrate.com/real-estate/new-house-calculator/
- https://haysto.com/mortgage-guide/getting-a-mortgage-with-credit-card-debt
- https://www.ramseysolutions.com/debt/debt-free-scream-your-inspirational-rally-cry
- https://www.nestapple.com/how-much-house-can-i-afford-on-100k-salary/
- https://www.incharge.org/debt-relief/debt-management/how-to-pay-off-50000-credit-card-debt-strategies-advice/
- https://www.capitalone.com/learn-grow/money-management/what-increases-total-loan-balance/
- https://www.nationwide.com/lc/resources/personal-finance/articles/types-of-assets
- https://www.rocketmortgage.com/learn/how-to-lower-your-mortgage-payment
- https://www.rocketmortgage.com/learn/who-is-responsible-for-a-mortgage-after-the-borrower-dies
- https://www.dupaco.com/2023/11/14/whats-the-best-way-to-deal-with-an-escrow-shortage/
- https://www.moneymanagement.org/blog/can-credit-card-debt-be-rolled-into-my-mortgage
- https://usaprojects.org/how-to-generate-income-from-your-residential-property/
- https://www.empower.com/the-currency/money/financial-liability
- https://www.cbsnews.com/news/how-much-credit-card-debt-is-too-much/
- https://financecorp.com.au/the-pros-and-cons-of-a-fixed-interest-rate-what-to-know/
- https://www.bankrate.com/mortgages/how-to-lower-mortgage-payments/
- https://www.nerdwallet.com/mortgages/mortgage-rates
- https://www.rocketmortgage.com/learn/why-is-my-mortgage-payment-changing
- https://www.furnessbs.co.uk/mortgages/mortgage-support-hub/overpay-mortgage-save
- https://themortgagereports.com/11306/buy-a-home-with-a-low-downpayment-or-no-downpayment-at-all
- https://www.reallymoving.com/help-and-advice/guides/how-does-credit-card-debt-affect-getting-a-mortgage
- https://www.sofi.com/learn/content/i-make-36k-a-year-how-much-house-can-i-afford/
- https://www.cnbc.com/select/how-to-calculate-debt-to-income-ratio/
- https://www.swensonlawfirm.com/exceptions-to-the-limited-liability-provided-by-a-llc
- https://www.progressive.com/answers/personal-liability-insurance/
- https://www.moneymanagement.org/blog/how-much-credit-card-debt-is-okay-when-buying-a-home
- https://www.equifax.co.uk/resources/mortgage/can-you-apply-for-a-mortgage-with-credit-card-debt.html
- https://themortgagereports.com/21985/high-debt-to-income-ratio-mortgage-approval
- https://www.investopedia.com/terms/d/dti.asp
- https://www.chase.com/personal/mortgage/education/managing-your-mortgage/why-did-my-mortgage-go-up
- https://www.bankrate.com/mortgages/arm-vs-fixed-rate/
- https://www.investopedia.com/terms/p/property-insurance.asp
- https://www.investopedia.com/terms/l/liability.asp
- https://www.coventrybuildingsociety.co.uk/member/help/mortgages/balance-increase-on-mortgage.html