Record Debt: Tips for Managing Your Mortgage
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, combined with higher interest costs, means higher monthly payments and declining affordability.
How many debts are there?
Overall household debt topped $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||Up to $945 billion|
|Home Equity Lines of Credit (HELOC)||$320 billion||Down $3 billion|
|Student loans||$1.59 trillion||Up to $19 billion|
|Car loans||$1.5 trillion||Up to $87 billion|
|Credit card||$890 billion||Up to $100 billion|
|Other (e.g. retail cards)||$470 billion||Up to $49 billion|
Meanwhile, mortgage rates are also much higher than they were a year ago:
The upward trend comes amid rising 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). The two forces have pushed average new monthly mortgage payments up 53.7% this year from $1,265 to $1,944, according to the NAR’s June Housing Affordability Index.
At the same time, inflation has made goods more expensive and wages have not kept pace. Over the past year, the median household income has increased by only 5.8%, reports the NAR.
For many households, the pressure is there, with prices too high and incomes too low to maintain old living standards. The result? More debt for American households.
How debt is a factor in getting a mortgage
Debt is a big concern for mortgage lenders, who measure a borrower’s debt-to-income ratio (DTI) to check their ability to repay the loan. The DTI ratio includes the projected mortgage payment and all other debt payments – student loans, for example. Too much debt and you may not qualify for the amount you want, or even any funding.
The DTI ratio is sometimes referred to as the “back end” ratio. Lenders also assess a “front-end” ratio, which looks only at the housing payment – mortgage principal, mortgage interest, property tax and building insurance (PITI) – against gross monthly income.
Different lending programs have different front-end and back-end ratios (DTIs):
- Conventional loans: No more than 28% front-end and 36% back-end
- FHA Loans: 31% front-end, 43% back-end
- VA Loans: 41% in the background
- USDA Loans: 29% front-end, 41% back-end
However, these ratios are not set in stone. Borrowers with “compensating factors,” such as a high credit score or plenty of cash, may still qualify for a mortgage, even with a higher DTI ratio. Many borrowers are able to obtain FHA loans, for example, with DTI ratios above 50%.
How to qualify for a mortgage with more debt
If you’re like the many Americans who have taken on more debt recently, you may need to adjust your financial habits to still qualify for a mortgage. Starts with:
- Review your monthly budget – If you’ve taken out a new loan (or several) in the past year, take stock of where you’re currently spending your money. If your income hasn’t increased, you may find that you have less room in your monthly budget for a mortgage payment than expected. To get an idea of your current situation, enter your debt payments into Bankrate’s How Much House Can I Afford Calculator.
- Pay back what you can – Although you can’t control the cost of groceries, you may be able to reduce your expenses during times of inflation in other ways, such as reducing your energy consumption or reducing discretionary expenses such as clothing or subscriptions. You can then channel those savings into debt repayment to lower your DTI ratio. You can choose to tackle credit card debt, starting with the loan with the highest monthly payment, or one of these other debt repayment strategies.
- Llook into down payment assistance – About a third of declined mortgage applications were rejected due to “insufficient” cash to close or “disqualifying DTI ratios,” according to an analysis of Home Mortgage Disclosure Act data by Down Payment Resource. If you qualify, a down payment assistance program could help you get the funds you need to offset a higher DTI ratio. Many of these programs are administered at the state level – you can find your state’s housing finance authority on Bankrate.
How to manage your mortgage with other debts
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:
- Set up a cushion – If possible, prioritize emergency savings and make sure you have at least three months of mortgage payments in the bank. Interest rates on savings accounts have been rising lately, so explore high-yield options to maximize what you invest.
- Avoid excessive credit card charges – Resist the temptation to dig deeper with credit cards. If you need help with necessities such as a utility bill, contact your provider for backup options. If you’re struggling with varying monthly payments, a debt consolidation loan with a lower interest rate might give you some relief. Keep in mind, however, that this is another loan that needs to be repaid.
- Contact your Mortgage Manager – If the worst happens and you know you won’t be able to make your mortgage payment, contact your servicer as soon as possible. If the difficulties are temporary, you may be offered a forbearance plan that will give you a break on payments.