Can You Buy A Home While Carrying Debt? Yes, Here's How

Do you carry debt but also want to buy a home? Many Americans think that this is a stumbling block so large that it's relatively insurmountable. But, in fact, you can overcome debt issues to qualify for a home purchase and mortgage programs. How? Here are four steps to take.

1. Learn About Ratios. The debt-to-income ratio is a key factor in qualifying for a mortgage. A debt-to-income ratio is the percentage of debt you carry at any given time in comparison with your income. For the most part, lenders want to see your current debt as less than about 28%. Once a mortgage is factored in, they like to see that ratio stay under about 36% to 40%. If your pre-mortgage debt comes to 25% of income, then, you would have between 11% and 15% to spend on a mortgage.

2. Shop Within Your Limits. Once you know your debt-to-income ratio, you have a target to aim for in a mortgage. Translate this monthly payment into a total mortgage amount. Add this to your down payment and look for homes within that price range. Will this amount give you enough to purchase a home you can work with? If so, then you're ready to focus on the next step, your credit score. If you won't be able to find a suitable home within your current limits, focus efforts on decreasing your current monthly payments. 

3. Assess Your Score. Your credit score is the other major factor to get a mortgage. Debt affects your score in several ways. First, a high amount of debt used versus credit available lowers your score. But some debt types affect it more than other loans. Credit card debt, for instance, has a bigger negative effect than student loans. If you can only pay one of these down (or off), you do well to focus on credit card debt first.

4. Reduce High-Impact Debt. To make large-scale changes in your debt-to-income ratio and your credit score at the same time, focus repayment efforts on debts that will have the biggest impact. Prepaying a car loan or student loan, for example, is unlikely to change your monthly debt load. Paying down a credit card with the same amount, though, lowers each monthly amount due and boosts your available credit amount. 

The process of transforming yourself into a good candidate for a mortgage even with other debt may take some time. Work with a lender as early as possible for the best outcome. But with the right focus and a good plan, you can make it work and secure the home you've always wanted.