Because mortgages are very large, long-term loans, your ability to handle debt is one of the biggest factors that mortgage lenders look at when deciding what kind of mortgages you may qualify for. Mortgage lenders use multiple tools to assess your financial health and ability to pay off debt.

One of these tools is your debt-to-income (DTI) ratio. This number is found by dividing your total monthly debt payments by your gross monthly income. Debts can include current housing costs, car payments, credit card payments, and more. Mortgage lenders use DTI and other financial information to determine what mortgage payment you can currently afford and how able you currently are to pay off loans.

The other main tools they look at are your credit report and credit score. Your credit report shows your credit and borrowing history, including whether you pay your bills on time, how much credit you use, and whether you are seeking new lines of credit. Your credit score is generated using your credit report and is shorthand for your “creditworthiness”. You can get free annual credit reports from each of the three major credit bureaus at annualcreditreport.com.

Below are some current debt considerations our lending partners would like you to keep in mind when looking to purchase a home:

Buy Now, Pay Later Apps

These popular apps, such as Afterpay, Klarna, and Affirm, allow users to purchase items from participating retailers and pay in monthly installments rather than upfront. Even though these services are separate from credit cards, they can still affect your DTI under the right circumstances. Most of these services allow you to choose from paying in 4 monthly installments (the default) or extending to more months to further reduce monthly payments. Many lenders will consider any debt that lasts for more than 10 months, even if that debt is not reflected on your credit report. Additionally, because these services are not credit cards, they only are reflected on your credit report if they go to collections or you become delinquent on your payments. On-time payments do not positively impact your credit score the way that credit card payments do.

Summary: These services generally do not affect your credit or DTI AS LONG AS you choose monthly installments lasting less than 10 months, and you pay consistently and on time.

Student Loans

While most lenders did not calculate DTI using student loans in the past, many now do. Student loans can be counted towards DTI in a few ways. If you are currently making regular payments on your student loans, then that monthly payment will be used to calculate DTI. If you are NOT currently making payments on your student loans, the lending institutions will generally calculate a stand-in monthly payment amount by taking a percentage of your total owed (generally 0.5-1%). For example, if you owe $50,000 in student loans, a mortgage lender using a 1% stand-in will calculate your monthly debt amount at $500.

One possible way to reduce this number is to get a quote for an Income-Driven Repayment Plan. This program makes your monthly payment a percentage of your income rather than the total loan amount. For example, if you make $2,000 a month and have an IDR plan for 10% of your income, your monthly payment amount would be $200. Finding out what your monthly payment would be does NOT mean that you will be forced to start making payments. This process allows both you and your mortgage lender to have access to more favorable financial information.

Summary: Student loans are generally included in DTI calculations, even if you are not currently making payments. Improve your mortgage conditions by getting loans out of default or finding a lower monthly payment option.

Car Loans

Most mortgage lenders factor car loans into DTI calculations. Co-signing on a car may be counted as well, even if you are not the owner of the car. This is because the car is still a possible financial liability. As with any kind of debt, having a large monthly car payment in comparison to your income can hurt your chances of receiving a mortgage. If you are in the market for a new car and buying a home at the same time, consider waiting to buy the car until AFTER purchasing the home. If you purchase the car first, the new monthly payment may raise your DTI and lead to a less favorable mortgage.

Summary: Consider how financial obligations may affect your DTI, such as co-signing on a car or adding a new monthly payment just before purchasing a home.

Credit Cards

Using credit responsibly and maintaining a good credit score are important factors when applying for a mortgage. Making the minimum monthly payment on credit cards is better than paying late or not at all. However, only paying the minimum can lower your credit score over time. It also keeps debts on your credit report for longer, as it takes longer to pay off a balance. Credit card debt is also counted into your DTI. Generally, the number used for DTI calculations is the minimum payment on any active credit accounts, whether or not that is the actual amount that you pay each month.

Having a lot of access to credit, whether through multiple cards or high credit limits, generally demonstrates to mortgage lenders that other lenders trust you to make your payments on time. This is especially true if your credit report shows that you use that credit responsibly. One way to take advantage of this is through maintaining credit accounts over time, even if you do not use them very often. Closing accounts that have gone into disuse at best removes its possible positive influence on your credit report. At worst, it makes it look like the lender did not want to continue its relationship with you. If you have a credit card that requires regular use to keep the account, consider using it for any monthly subscriptions you already pay in full each month.

Summary: Credit cards are important to consider for your credit report and your DTI. Maintaining healthy credit habits and expanding your access to credit can contribute to favorable conditions for mortgage lending.

Every mortgage lender is different. To learn more about how to get your finances ready for buying a home, visit our Getting Started page for first-time home-buyers. To speak directly with a mortgage lender, check out our list of Lender Members.