How Much Debt Is Too Much If You Want to Buy a Home?

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How Much Debt Is Too Much If You Want to Buy a Home?

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Having a lot of debt has become commonplace these days to the point that no one even thinks about it until they want to buy a home. In fact, it has become normal to have thousands of dollars in debt although this can significantly harm your chances of being approved for a mortgage.

Here is the maximum amount of debt you should have and what to do if you’ve gotten in over your head. If you’ve found that you have too much debt to buy a home, don’t hesitate. Do something about it now.

43% Debt-to-Income Ratio

The Consumer Financial Protection Bureau recommends that you keep a debt-to-income ratio of less than 43%. When people have debts that exceed 43% of their income they often have trouble making their monthly payments.

If you want to purchase a home soon and your monthly mortgage payment will put you at over 43%, you should start lowering your debt before you apply for a mortgage.

Debt Affects Your Credit Score

Debt can be especially harmful to your chances of being approved for a mortgage if its credit card debt. Credit card debt accounts for 30% of your FICO score.

How much credit card debit is too much to buy a home? Generally, lenders don’t want you to use more than 30% of your available credit. If you have charged beyond 30% of your available credit, they will probably recommend that you improve your financial situation first before they approve you.

Most of Your Debt Is Bad Debt

Bad debt, unlike good debt, doesn’t add to your net worth or have any lasting value. It generally includes items that you chosen to finance because you didn’t have cash to cover the cost.

Having a lot of bad debt means that you are living beyond your means. The general signs that you have too debt include:

  • You live paycheck to paycheck
  • You have to depend on credit cards to make ordinary purchases
  • Your debt balance never decreases despite the fact that you make regular payments
  • You don’t have an emergency fund and struggle to make one
  • Your debts are more than half of your income
  • You are unable to make regular contributions to your retirement plan