Can I buy a house if I’m in debt?

Are you considering buying a home but aren’t sure if it’s possible with your student loan, car payment or other debts? While lenders look at more than just your debt when determining if you qualify for a home loan, your debt-to-income ratio plays a significant role in whether you’re ready for a mortgage.1 Learn how to calculate this ratio, why exactly it’s so important, and steps you can take to get your finances in order for future homeownership.

Understand your debt-to-income (DTI) ratio

To calculate your DTI, add up all of your monthly debt payments and divide them by your monthly income before taxes. Monthly debt payments include things like auto loan payments, student loans and credit card bills.2

(Total debt payments / Gross monthly income) x 100 = DTI

For example, if your monthly debt payments are $2,100, and your monthly income is $6,000, your debt-to-income ratio is 35%.

Why is the debt-to-income ratio important?

Because, according to the Consumer Financial Protection Bureau, it’s “one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.”3 As a borrower, your debt is measured in relation to your income. If your combined monthly debts exceed 50% of your income, you may have trouble qualifying for a conventional mortgage loan. This includes your monthly mortgage payment. The following are the specific rules for the Federal Housing Administration (FHA) and Conforming mortgage home loans.

  • The maximum DTI for an FHA mortgage loan is 43% for most borrowers. However, “a higher level of debt might be allowed if there are certain ‘compensating factors,’ such as a minimum increase in monthly housing costs, or additional cash reserves.”4
  • A Conforming loan is a non-government loan that meets the funding criteria of Freddie Mac and Fannie Mae. Recently, both Fannie Mae and Freddie Mac announced that they would allow DTI limits of up to 50%. “This means it is now easier to qualify for a mortgage loan with existing debt,” states the Home Buying Institute.5

It’s time to take action

Regardless of the amount of debt you owe, there are steps all first-time homebuyers can take to prepare financially for homeownership. These six tips are a great place to start.

  1. Set up a budget. Maintaining a budget to track your income and expenses is essential to achieving a goal of owning your own home. A budget puts you in control of overspending and saving money.6 From determining your income to establishing spending amounts, here are seven steps to setting up a budget.
  2. Focus on your credit score. In addition to your debt-to-income ratio, your credit score affects your ability to get a home loan and the rate you’ll pay. The higher your score, the less of a risk you pose to a lender, and therefore, the more likely they’ll be to approve you for a loan.7 Start by requesting your free credit report, then checking it for accuracy. Read more about how your credit score is determined and how to build a stronger score.
  3. Get pre-approved. Mortgage loan pre-approval typically costs you nothing but gives you a price range of what homes you can afford, as well as how much money you should look to have saved for a down payment.
  4. Review your down payment options. The advantage of a larger down payment is the potential for lower borrowing costs, which may mean a smaller monthly payment. However, there are affordable lending options and down payment assistance programs designed for homebuyers who can afford monthly mortgage payments but don’t have enough money saved for 20% down payment.
  5. Educate yourself.Research tools and resources to prepare yourself for home ownership. Start by reviewing the Guild Mortgage first-time homebuyer guide.
  6. Ask questions. Arm yourself with as many questions as you need to familiarize yourself with the homebuying process. When you hire the right real estate agent and choose the best lender for your situation, they will help guide you every step of the way.

While homeownership may not be ideal for your situation right now, that doesn’t mean it’s unreachable. Personal finance site Market Watch recommends staying on top of your debts, sticking to a budget and living within your means. “Remember, don’t rush the process; unlike a typical race, there is no time limit to this one.”8

Learn more about how to prepare yourself for homeownership with helpful tips, answers to common questions and mortgage calculators in the Guild Mortgage home loan guide.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.

1What Do Lenders Look at When I Apply for a Mortgage? – Home Buying Institute

2Can you buy a house if you have student loans? –

3What is a debt-to-income ratio? – Consumer Financial Protection Bureau

4How Much Debt Can I Have and Still Get a Mortgage Loan? – Home Buying Institute

5How Much Debt Can I Have and Still Get a Mortgage Loan? – Home Buying Institute

6Reasons Why You Should Budget Your Money – the balance

7How do I get and keep a good credit score? – Consumer Financial Protection Bureau

8How to buy a house even if you’re still in debt – Market Watch