Too much or too little debt?

Anyone looking to get a loan is bound to ask themselves whether the loans they currently have or the money they currently owe may keep them from obtaining this new loan.

The truth is it does — but not in the way you would think. The bank isn’t adding up all your balances and saying, “You owe too much.” Instead, they’re only looking at your monthly payments. That means the actual payment amounts are what matter, not how big the total debt is.

Here’s what that looks like in real life:

• You could have a car loan for $20,000, but if the monthly payment is only $400, the lender just counts $400 against you.

• You might owe $5,000 on a credit card, but if the minimum payment is $150, they only use $150 in the calculation.

• Even if you owe $200,000 in student loans, if your income-based repayment plan is only $250/month, that’s the number the bank uses.

This is why many people are surprised to find out they don’t have to pay off all their debts before qualifying for a mortgage. What matters most is your Debt-to-Income ratio (DTI) — how your total monthly debts stack up against your monthly income. AND how much you want to qualify for. If you are looking for a 500k home instead of a 900k home you won't need as much income and so you won't be hurt by as much debt. 

That’s why it’s always smart to sit down with a loan officer before moving money around. We can look at your full picture and show you whether paying something off is even necessary — or if you’re already in a good position to buy.