How Debt Affects Your Ability to Buy a Home

23 November 2025

So, you're dreaming of walking through the front door of your very own home, keys in hand, ready to finally ditch your landlord once and for all. Sounds amazing, right? But then—bam!—you remember that nagging little four-letter word that keeps popping up in your bank statements: Debt.

Debt can be like the unexpected third wheel on a romantic date with homeownership. It looms in the background, whispering sweet nothings like, "Sorry, your credit score isn’t quite there," or "Yeah, that mortgage payment? Not today, pal."

But hey, don’t lose hope just yet! Let’s break down exactly how debt affects your ability to buy a home without making your brain do cartwheels. We’ll talk credit scores, monthly payments, and how to wrangle that pesky debt monster so you can finally get those keys in your hand.

What Exactly Is Debt, Anyway?

Alright, let’s not overcomplicate things. Debt is basically money you owe someone—whether it’s from student loans, credit cards, car payments, or even that time you financed a fancy couch during a Black Friday sale.

Not all debt is bad. Some of it helps you build credit or improve your lifestyle. But when you’re trying to buy a home, how much you owe—and how you manage it—can absolutely make or break your chances of getting approved for a mortgage.

Why Lenders Care About Your Debt

Think of lenders as cautious matchmakers. They're not just handing out love letters (aka mortgage approvals) to every Tom, Dick, and Harriet. They want to be sure you're financially ready for a long-term commitment.

So, they take a good hard look at your debt. Here’s what they're checking:

1. Your Debt-to-Income Ratio (DTI)

This is basically how much of your monthly income goes toward paying off debts. The lower the number, the happier the lender.

Formula:
(Total Monthly Debt Payments ÷ Gross Monthly Income) x 100 = DTI%

Let’s say you make $5,000 monthly and spend $1,500 on debt. Your DTI is 30%. Most lenders prefer a DTI under 43% for mortgage approval. Lower than 36%? Even better!

2. Your Credit Score

Yep, this magical three-digit number tells lenders how trustworthy you are with borrowed money. Debt affects your credit score in several ways—especially if you're carrying a high credit card balance or have missed a few payments.

The higher your credit score, the better the loan terms you’ll get. Think lower interest rates, higher borrowing amounts, and a smoother ride to the closing table.

The Dirty Details: Types of Debt That Mess Things Up

Now, let’s spill the tea. Not all debt hits your homebuying dreams the same way. Some types are more like minor speed bumps, while others can be full-on roadblocks.

🏦 Credit Card Debt

High-interest credit card debt is the financial equivalent of quicksand. It drags down your credit score, bloats your DTI, and makes lenders nervous. If you're using more than 30% of your credit limits, they may assume you’re struggling to stay afloat.

Friendly tip: Try to pay off your cards or at least keep your utilization under that magical 30% number.

🎓 Student Loans

Student loans are like that clingy ex—hard to ignore but manageable if you’re on good terms. Depending on how you repay and your balance, it can weigh heavily on your DTI. But if you’re in a steady repayment plan with no missed payments, lenders might cut you some slack.

🚘 Auto Loans

A car loan isn't the worst debt to have, but it does add to your monthly obligations. If you're driving a luxury SUV with a $700 car payment, that’s going to eat into the amount of house you can afford.

🤝 Personal Loans

Personal loans are a mixed bag. Lenders see them as red flags if you’ve racked up several in a short time. If it looks like you’re always borrowing to make ends meet… well, that’s not the best look.

So, How Much Debt Is Too Much?

Great question. There’s no one-size-fits-all answer, but here’s a simple cheat sheet:

| DTI Range | What It Means |
|-------------------|-----------------------------------|
| 0–36% | Smooth sailing—looking strong! |
| 37–43% | Proceed with caution |
| 44–49% | Starting to raise eyebrows |
| 50%+ | 🚨 Danger zone! 🚨 |

Remember, lower debt gives you more buying power and usually better loan terms. More debt means either:
- You won’t be approved,
- You’ll qualify for a smaller mortgage,
- You’ll get slapped with a higher interest rate.

The Domino Effect: How Debt Shrinks Your Buying Power

Let’s say you’ve got a decent income and you’re eyeing a $400,000 house. Exciting, right?

But then your lender looks at your debt and goes, “Hmm, let’s adjust that dream a bit.”

Why? Because every dollar you owe in debt is a dollar you can’t spend on a mortgage. For example, if you're paying $500 in monthly debt payments, that’s $500 less you can allocate toward a home loan.

It’s like trying to fit your dreams into skinny jeans. That extra bulge (aka debt) limits how much you can stretch.

How to Tidy Up Your Debt Before House Hunting

Don’t worry—this isn't a hopeless situation. You can get your debt under control. Here's how to clean up your financial act before knocking on your dream home’s door:

🧼 1. Review Your Debts Like a Boss

Go full Marie Kondo on your finances. Pull out all your debt accounts, list balances, interest rates, and monthly payments. What sparks joy? Definitely not 19.99% APR.

✂️ 2. Trim What You Can

Start with high-interest debt (yes, you again, credit cards). The snowball or avalanche method can help here. Either pay off the smallest balance first (snowball) or tackle the highest interest rate (avalanche). Choose your weapon.

📈 3. Boost Your Income

Sounds obvious, but sometimes the best way to fix a debt ratio is to increase the other side of the equation. Side hustle? Freelance gigs? Asking for a raise? All are fair game.

🧠 4. Don’t Take On New Debt

No matter how tempting that 85-inch TV is, now’s not the time to open a new credit card or finance a new toy. Too many inquiries or new balances will ding your credit and wreck your chances for a mortgage.

🧾 5. Address Late Payments

If you've missed payments, get back on track yesterday. Payment history makes up a huge chunk of your credit score—roughly 35%, to be exact.

What Lenders Want to See

Here’s what lenders love to see when they're reviewing your application:

- A credit score above 620 (higher is better)
- A DTI under 36%
- A steady income with proof
- A history of paying debts on time
- Low or zero balances on revolving credit

If you’ve got all that? You’re sitting pretty.

Can You Get a Mortgage With Debt? (Spoiler: Yes, But…)

Now let’s answer the million-dollar question: Can you get a mortgage even if you have debt?

Short answer: Yes.

Longer answer: Yes, but only if your debt is manageable and doesn’t blow your DTI out of the water.

Many folks carry some form of debt when buying a home. Student loans, car payments, a small credit card balance—none of these are automatic deal-breakers. What matters is how you're handling them.

Are you making regular payments?
Are you keeping credit utilization low?
Are you not maxed out every which way?

If the answer is "Yes," then you stand a good chance. If not, you’ve got some homework to do before you go house shopping.

A Quick Debt-to-Home Shopping Analogy

Think of your finances like a suitcase. The more debt you pack in, the less room there is for new shoes—err, I mean, a new mortgage.

If your lender sees that your financial suitcase is already bursting at the seams, they’ll worry you can’t fit another commitment in. So lighten the load, repack smarter, and you'll have more space (aka homebuying power).

Final Thoughts: Debt Doesn't Have to Be the Dealbreaker

Listen, debt isn’t some evil villain standing between you and your dream home. It’s just a factor—a big one, sure—but totally manageable.

When it comes to buying a home, what matters most is how you handle your money. You don’t need to be debt-free (though it helps), but you do need to be responsible, realistic, and refreshingly honest about where you stand.

So take a deep breath. Review your debts, make a plan, and start paving your way to that dream house—one payment at a time.