Your mortgage lender does not count every dollar you spend each month, but some payments people assume will be ignored can absolutely affect how much house they qualify for.
A car lease with four months remaining can count. Your cell phone bill generally does not.
A credit-card minimum payment can count. Your weekly grocery bill generally does not.
So where is the line?
The answer starts with your debt-to-income ratio, commonly called DTI. Understanding which payments go into that calculation can help you avoid surprises when you apply for a mortgage.
What is a debt-to-income ratio?
Your debt-to-income ratio compares your required monthly debt payments with your gross monthly income.
Gross income means your income before taxes, insurance, retirement contributions, and other deductions are taken out.
Suppose you earn $7,000 per month before taxes and have:
- A $600 car lease
- A $200 student-loan payment
- A $100 credit-card minimum payment
- A proposed housing payment of $2,500
Your total monthly obligations in this example would be $3,400.
Divide $3,400 by $7,000, and your debt-to-income ratio would be approximately 48.6%.
That does not automatically tell us whether the mortgage will be approved. Acceptable ratios depend on the loan program, credit profile, available assets, underwriting findings, and the complete application.
But the example shows why knowing which debts count matters.
Your proposed housing payment
The new housing payment is one of the largest pieces of the calculation.
Depending on the property and loan, it may include:
- Mortgage principal and interest
- Property taxes
- Homeowners insurance
- Mortgage insurance
- HOA dues
- Payments on additional financing secured by the property
This is why two homes with the same purchase price can produce different qualification results. Property taxes, insurance, HOA dues, interest rates, and down payments can all change the total housing payment.
Car loans and other installment debts
A vehicle loan is an example of installment debt. You borrow a set amount and repay it through scheduled monthly payments.
Other examples can include:
- Personal loans
- Furniture financing
- Equipment loans
- Certain student loans
- Recreational vehicle loans
- Motorcycle loans
- Timeshare obligations
For a conventional loan following Fannie Mae guidelines, installment debt with more than ten monthly payments remaining is generally included in the debt-to-income calculation.
A debt with ten or fewer payments remaining may sometimes be excluded, but that is not automatic. The lender may still need to count it when the payment significantly affects your ability to handle your other obligations.
A $75 payment with four months remaining may be viewed differently from a $1,200 payment with four months remaining.
Let your lender review the actual debt before assuming it will disappear from the calculation. You can see another example in How a Car Payment Can Change Your Mortgage Buying Power.
Car leases
Car leases are treated differently from regular installment loans.
Under current Fannie Mae conventional guidelines, a lease payment is considered a recurring monthly obligation regardless of how many payments remain.
That means a borrower with four months remaining on a $700 vehicle lease should not automatically assume the payment will be excluded.
The reasoning is that when the lease ends, the borrower will generally still need transportation. They may enter another lease, purchase the existing vehicle, or finance a different one.
The current lease may be ending, but the need for a vehicle payment may not be.
If you want a deeper explanation, read Does Leasing a Car Affect Getting a Mortgage?
Credit cards and revolving accounts
Credit cards are revolving accounts because you can borrow, repay, and borrow again without having a fixed payoff schedule.
Mortgage qualification generally focuses on the required minimum monthly payment, not the entire credit-card balance.
For example, a $5,000 credit-card balance does not necessarily mean the lender adds $5,000 to your monthly debts. The lender generally uses the required monthly payment shown on the credit report or determined under the applicable program guidelines.
That does not mean the balance is unimportant. High balances can affect your minimum payments, credit utilization, credit scores, and available cash.
Paying down a credit card can potentially help in more than one way, but do not move money around or close accounts without first discussing the plan with your lender.
Student loans
Student loans can count even when the payment appears low, deferred, or temporarily set at zero.
How the qualifying payment is determined depends on the loan program, the information appearing on the credit report, and the documentation available from the student-loan servicer.
For certain conventional loans, the lender may be able to use a documented income-driven payment, including a properly documented zero-dollar payment. When the loan is deferred or in forbearance and no usable payment is available, the lender may need to calculate a payment using the balance or repayment terms.
FHA, VA, USDA, and conventional programs do not necessarily treat every student-loan situation identically.
Do not assume a deferred student loan will be ignored. Have your lender review the credit report and current student-loan documentation.
Alimony, child support, and maintenance payments
Court-ordered obligations such as alimony, child support, or separate maintenance may need to be included when they will continue for the period required under the applicable loan guidelines.
The lender will generally need documentation showing:
- The required payment
- How long the obligation will continue
- Whether the payments are current
- Any applicable court order or legal agreement
These obligations can be sensitive, but they are part of the financial picture the lender may need to evaluate.
Other mortgages, HELOCs, and real estate debt
Payments connected to other properties can affect qualification.
That may include:
- A mortgage on another home
- A home equity loan
- A HELOC requiring monthly payments
- Taxes and insurance on another property
- HOA dues
- A net loss from a rental property
Rental income may help offset some property expenses when it meets the loan program’s documentation requirements. However, owning a rental property does not mean the entire mortgage payment automatically disappears from the calculation.
The lender needs to review the property, mortgage, rental income, tax returns, lease agreement, and other applicable documentation.
Tax payment plans and other recurring obligations
A payment plan with the IRS or another recurring legal obligation may also need to be considered.
If you are making monthly payments under an installment agreement, provide the agreement and proof that the payments are current.
The same general rule applies to obligations that may not appear clearly on a credit report: disclose them and let the lender determine the correct treatment.
Leaving a debt off the application does not make it disappear. If an additional obligation is discovered later, the lender may have to recalculate the debt-to-income ratio before closing.
What about Buy Now, Pay Later accounts?
Buy Now, Pay Later services can be easy to overlook because the payments may be small and spread across several purchases.
Whether a particular account affects mortgage qualification can depend on its terms, payment schedule, credit reporting, and the loan program being used.
The safest approach is to disclose any active payment obligations. A collection of small payments can become meaningful when they are added together.
Try to avoid opening new financing accounts while preparing to buy a home or while your mortgage is being processed.
What if someone else makes the payment?
Sometimes a borrower is legally responsible for a debt, but another person has actually been making the payments.
For a conventional loan following Fannie Mae guidelines, certain non-mortgage debts may be excluded when another person has made the payments for the most recent 12 months without delinquency.
This may apply to obligations such as:
- Car loans
- Car leases
- Student loans
- Credit cards
- Certain other non-mortgage debts
The lender must document the payment history using acceptable evidence from the person who made the payments. Simply saying, “My parents pay that,” is not enough.
The person making the payments also cannot be an interested party in the home purchase, such as the seller or real estate agent.
What if you co-signed for someone?
Co-signing can affect your mortgage application because you are legally responsible for the debt if the other borrower stops paying.
The payment may appear on your credit report and may initially be included in your obligations.
If the other person has made the payments from their own account for the required period without delinquency, documentation may allow the lender to exclude the payment under certain guidelines.
Once again, we need proof. The lender may request bank statements, canceled checks, or other records showing who made each payment.
This is a good example of why it helps to review your finances before you are ready to make an offer.
Which monthly expenses generally are not part of conventional DTI?
Everyday living expenses generally are not treated as recurring debts in the conventional DTI calculation.
Examples may include:
- Groceries
- Gas
- Cell phone service
- Internet
- Streaming subscriptions
- Gym memberships
- Clothing
- Restaurants
- Car insurance
- Regular utility bills
That does not mean these expenses are unimportant.
Your mortgage qualification is based partly on gross income, but you live on the money that actually reaches your bank account. Groceries, utilities, insurance, childcare, home maintenance, savings, and everything else still need room in your real budget.
Some loan programs also look beyond the standard DTI calculation. VA underwriting, for example, includes a residual-income analysis intended to evaluate how much money the household should have remaining after major obligations and housing expenses.
A lender may approve more than you personally feel comfortable spending. Your comfortable payment matters too.
Should you pay off debt before applying?
Sometimes paying off or reducing a debt can improve qualification. Sometimes using a large amount of savings to eliminate a small payment is not the best decision.
Before paying anything off, ask your lender to compare the options.
We may want to look at:
- How much the monthly payment affects your DTI
- Whether paying it off changes your approval
- How the payoff affects funds available for closing
- Whether you still have adequate savings after closing
- Whether paying down another account would help more
- Whether the debt is already close enough to payoff to be treated differently
The goal is not simply to have the fewest debts. The goal is to put you in the strongest overall position for the home you want to purchase.
Review the numbers before making another financial commitment
If you are planning to buy within the next six to twelve months, talk with a mortgage lender before financing a vehicle, opening a new credit card, co-signing a loan, or taking on another monthly payment.
You may find that the new obligation has very little effect.
You may also discover that a payment you considered small changes the home price or monthly housing payment you can qualify for.
It is easier to review that decision before signing the paperwork than to rebuild the mortgage plan afterward.
If you want help identifying which of your payments may count, let’s review the actual numbers. You do not need to have everything figured out before asking questions.
No pressure. We can look at what you have, what you want to do, and build a reasonable plan from there.
Travis Arbuckle · Mpire Financial
NMLS #2488776 · Company NMLS #2108504
Clarity over pressure.
This article is for general educational purposes and is not a loan approval or commitment to lend. Debt treatment, qualifying ratios, and documentation requirements vary by borrower, lender, loan program, and transaction.