Debt Is Not A Mortgage Deal-Breaker

I connect with prospective new homebuyers every day who are stressed about decreasing their debt loads. 

While I understand that carrying a bunch of consumer debt is not fun, it’s also a bit of a misconception that you need to be completely rid of it before you buy a home.

Having debt doesn’t automatically disqualify you from getting a mortgage. What lenders really look at is your ability to manage and service your debt effectively. This is where your debt ratios:

Gross Debt Service (GDS) Ratio measures the portion of your income that would go towards housing costs, including mortgage payments, property taxes, heating, and half of condo fees, if applicable. Lenders prefer this number to be below 32% of your gross income. It shows you can comfortably cover housing costs without financial strain.

Total Debt Service (TDS) Ratio goes a step further by including other debts into the calculation, such as car loans, credit card payments, and other loans. Ideally, this should be no more than 40% of your gross income. A TDS within this range assures lenders that you can manage your housing costs plus other debt obligations without overextending yourself.

Total Debt to Income (TDI) Ratio is a broader measure, sometimes simply referred to when discussing TDS. It encompasses all monthly debt payments divided by your gross monthly income, highlighting your overall debt management.

Using Debt Wisely

Rather than eliminating all your debt, focus on demonstrating a responsible payment history. Regular, on-time payments can significantly boost your credit score, making you a more attractive candidate for mortgages. Lenders are looking for reliability and a track record of responsible credit use.

Remember, it’s about balance. Having some debt can actually be beneficial as it helps you build a credit history that lenders can assess. It shows that you have experience managing credit and can handle regular payments, which is precisely what mortgage repayment is all about.

The Bottom Line

You don’t need to be debt-free to buy a home; you need to be debt-savvy. By understanding and optimizing your GDS, TDS, and TDI ratios, you position yourself as a responsible borrower. Whether you’re just starting to think about buying a home or you’re actively looking, taking control of your debt is a crucial step.

Let’s talk about how you can prepare for a mortgage, regardless of your current debt level. The goal isn’t zero debt—it’s smart debt management.