How Different Types of Debt Impact Preapproval or Prequalification Amounts

Homebuyers can typically qualify for mortgage preapproval or prequalification even if they have existing debt, such as credit cards, student loans, or auto loans. When determining your eligibility for a home loan, mortgage lenders consider several factors, including your total debt and what you pay toward it each month.

However, not all debt affects mortgage prequalification or preapproval the same way. Understanding how different types of debt can impact mortgage preapproval or prequalification can help you prepare to buy a home and determine if paying down certain balances will help your mortgage approval. Learn more about the differences between prequalification and preapproval.

Can You Get Preapproved or Prequalified for a House With Debt?

It’s possible to get preapproved or prequalified for a house even if you have debt. Although lenders consider a variety of factors when evaluating your eligibility for a home loan, debt plays a critical role in the process.

One way lenders evaluate your existing debt is by looking at your debt-to-income ratio (DTI). This ratio helps lenders determine how much of your income goes toward monthly debt payments and whether you are able to qualify for a mortgage. If a large portion of your income already goes toward monthly debt payments, such as auto loans or credit cards, it could limit how much you qualify to borrow with a mortgage.

While the amount of debt you have compared to your income helps determine your mortgage eligibility, it's not the only factor lenders consider. The type of debt you carry and how you manage it can also affect other aspects of your financial profile, including your credit. Ultimately, lenders may consider your overall financial picture when determining your mortgage preapproval or prequalification amount.

How Do Different Types of Debt Affect Mortgage Qualification?

While the amount of debt you have is an important factor lenders consider, how a specific debt is treated often comes down to details like whether it has a stated minimum payment, how many payments remain, and your payment history on the account. Requirements may also vary depending on whether you're applying for a conventional, FHA, VA, or USDA loan.

Can Paying Off Debt Increase Your Preapproval or Prequalification Amount?

Paying down or eliminating debt may free up more space in your budget for the expenses that come with buying a home. However, that doesn't guarantee you'll increase your preapproval or prequalification amount. How much of an impact it has often depends on the type of debt you're paying off.

For example, reducing large credit card balances could lower your required minimum monthly payments and improve your credit utilization, which may help your credit score but may have a minimal effect on your DTI. On the other hand, paying off a personal loan or an auto loan could eliminate a large monthly payment from your DTI calculation, although some lenders may already exclude installment loans with 10 or fewer payments remaining.

Before you decide to tap into your savings to pay off debt, consider other homebuying expenses. Your down payment, closing costs, moving expenses, and other costs can add up quickly. You'll also want to keep enough savings for unexpected homeownership expenses. Plus, lenders may consider how much money you have in savings when evaluating your application. A home affordability calculator can help you estimate how much house you may be able to afford.

If you're considering paying off a large amount of debt before applying for a mortgage, it’s best to speak with your lender first. They can help you understand how reducing certain debts may affect your DTI and mortgage qualification so you can decide whether to focus on paying down debt or keeping more money in savings for your home purchase.

Getting Preapproved or Prequalified with Debt FAQs

Still have questions about getting preapproved or prequalified for a mortgage while carrying debt? Here are answers to some common questions.

How Much Debt Can You Have and Still Get Preapproved for a Mortgage?

There's no universal dollar limit on how much debt you can have and still get preapproved for a mortgage. While lenders generally prefer a DTI of 36% or lower, some may accept a DTI of 45% or higher depending on the loan type and your financial circumstances. Your eligibility also depends on factors like your income, credit, and lender requirements.

Is It Better to Pay Off Debt Before Getting Preapproved or Prequalified?

Whether it's better to pay off debt before getting preapproved or prequalified ultimately depends on your financial situation. While paying off certain debts may lower your monthly payments and DTI, you'll also want to make sure you have enough savings for your down payment, closing costs, and other homebuying expenses.

Does Debt Affect How Much House You Can Afford?

Yes, having debt can directly affect how much house you can afford. When a larger percentage of your monthly income goes toward making existing debt payments, you may have less money available for housing costs. This can affect both your mortgage qualification amount and your personal budget.

Should You Take on New Debt After Getting Prequalified or Preapproved?

Generally speaking, it’s best to hold off on taking on new debt while applying for a mortgage or waiting to close on your home. New debt can increase your DTI, potentially affect your preapproval amount, qualifying mortgage rate, or lead to being denied a mortgage after preapproval.

Final Thoughts: How Your Debt May Affect Your Mortgage Options

Whether you have credit card balances or are working on paying off an auto loan, the type and amount of debt you carry can affect your mortgage preapproval or prequalification amount. However, debt is just one part of the mortgage qualification process. Taking the time to review your monthly debt payments, DTI, credit, and savings can help you determine whether to pay down debt, adjust your homebuying budget, or move forward with mortgage preapproval.

A mortgage loan officer can help you explore your mortgage options and understand how your existing debt may impact your eligibility. When you're ready to take the next step, apply for a mortgage with Freedom Mortgage to get started.