Consumer debt topped $16 trillion for the first time in the second quarter of this year, according to figures from the Federal Reserve Bank of New York. For mortgage borrowers, higher debt coupled with higher interest costs means higher monthly payments and shrinking affordability.
How big is the debt?
Total household debt rose to over $16 trillion in the second quarter of 2022, encompassing everything from auto loans to credit cards, the New York Fed recently reported. Mortgage debt, in particular, has increased by nearly $1 trillion over the past year:
|mortgages||$11.39 trillion||$945 billion up|
|Home equity lines of credit (HELOCs)||$320 billion||$3 billion less|
|student loans||$1.59 trillion||$19 billion up|
|car loans||$1.5 trillion||$87 billion up|
|credit cards||$890 billion||$100 billion increased|
|Other (e.g. retail cards)||$470 billion||$49 billion up|
Mortgage rates are now also much higher than they were a year ago:
The uptick comes from higher home prices, with the median existing home price hitting $416,000 in June, according to the latest report from the National Association of Realtors (NAR). Both forces have pushed average monthly mortgage payments up 53.7 percent this year from $1,265 to $1,944, according to NAR’s June Housing Affordability Index.
At the same time, inflation has made goods more expensive and wages have not kept up. Last year, median household income increased just 5.8 percent, reports NAR.
For many households there is pressure, prices are too high and incomes too low to maintain the old standard of living. The result? More debt for American households.
How Debt Helps Obtain a Mortgage
Debt is of great concern to mortgage lenders, who measure a borrower’s debt-to-income ratio (DTI) to verify the ability to repay the loan. The DTI ratio includes the projected mortgage payment and all other debt payments – for example student loans. Too much debt and you may not be able to qualify for the amount you want or even any financing at all.
The DTI ratio is sometimes referred to as the “back-end” ratio. Lenders also evaluate a “front-end” ratio that looks solely at the home payment — mortgage principal, mortgage interest, property tax and property insurance (PITI) — relative to monthly gross income.
Different lending programs have different front-end and back-end (DTI) ratios:
- Conventional Loans: No more than 28 percent frontend and 36 percent backend
- FHA loans: 31 percent frontend, 43 percent backend
- VA loan: 41 percent backend
- USDA Loans: 29 percent frontend, 41 percent backend
However, these conditions are not set in stone. Borrowers with “compensating factors” such as People with high credit ratings, such as high credit scores or lots of cash, might also qualify for a mortgage with a higher DTI ratio. For example, many borrowers can obtain FHA loans with DTI ratios in excess of 50 percent.
How to qualify for a mortgage with more debt
If you’re like many Americans who’ve taken on more debt lately, you may need to adjust your financial habits to remain eligible for a mortgage. Start with:
- Check your monthly budget – If you took out a new loan (or several) in the past year, take stock of what you are spending your money on now. If your income hasn’t grown, you may have less room in your monthly budget for a mortgage payment than you planned. To get an idea of where you might be right now, enter your debt payments into Bankrate’s How Much House Can I Afford? calculator.
- Pay what you can – While you can’t control the cost of groceries, you may be able to save in other ways during times of inflation, such as: You can then use those savings to pay off debt to lower your DTI ratio. You might choose to attack credit card debt, start with the loan that has the highest monthly payment, or one of these other debt-repayment strategies.
- LUse of a down payment assistance – About a third of rejected mortgage applications were denied due to “insufficient” cash to close or “disqualifying DTI quotas,” according to Down Payment Resource’s analysis of Home Mortgage Disclosure Act data. If you’re eligible, a down payment assistance program could help you get the funds you need to offset a higher DTI quota. Many of these programs are administered at the state level – you can find your state’s housing finance agency on Bankrate.
How to manage your mortgage with other debt
If you already have a mortgage and have taken on more debt, now is the time to reassess your finances, especially with the uncertainty in the economy. Here are three tips:
- Put on a pillow – Prioritize emergency saving if possible and make sure you have at least three months’ worth of mortgage payments in the bank. Interest rates on savings accounts have been rising lately, so explore high-yield options to maximize your deposits.
- Avoid excessive credit card fees – Resist the temptation to dig deeper into your pocket with credit cards. If you need help with necessities like a utility bill, contact your provider for relief options. If you’re struggling with various monthly payments, a debt consolidation loan with a lower interest rate can give you some breathing room. However, note that this is another loan that must be repaid.
- Contact your mortgage servicer – If the worst happens and you know you cannot make your mortgage payment, contact your servicer as soon as possible. If the hardship is temporary, you may be offered a forbearance plan that gives you a break from paying.