Can you consolidate debt into your mortgage when you buy a home? I cannot qualify for a mortgage due to my high debt-to-income ratio but may be able to qualify if I can reduce my monthly debt payments.

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

Unfortunately you cannot payoff debt with the proceeds from a home purchase mortgage. In fact, you cannot take out any cash proceeds from a mortgage used to buy a home. There are a very small number of programs that enable you to consolidate or payoff student loan debt when you buy a home but these programs are relatively scarce and offered by state or local housing departments, which limits their availability.

Having too much debt can create a significant obstacle when you apply for a mortgage. Lenders apply a debt-to-income ratio to determine what size mortgage you can afford.

The debt component of your debt-to-income ratio includes your mortgage payment, property tax, homeowners insurance and potential costs such as mortgage insurance and HOA fees plus other monthly debt payments for credit cards and car, student and personal loans. In short, if your non-housing related debt expenses such as your credit card bills are too high you may not be able to qualify for a mortgage or afford the loan you want.

Use ourDEBT-TO-INCOME RATIO CALCULATORto determine what size mortgage you can afford

Even though you cannot consolidate debt with your mortgage when you buy a home, there are some alternatives worth exploring to improve your debt-to-income ratio and help you qualify for a mortgage. We outline several potential solutions below.

Set up a debt repayment plan. Your first option is to set up a plan to pay down or off your debt. You can accomplish this by cutting back on certain discretionary expenses or setting up payment plans that focus on the debt with the highest interest rate first. This approach requires financial discipline on your part but the sooner you reduce your debt expenses, the sooner you can qualify for a mortgage.

Consolidate your debt with a personal loan. Another option is to consolidate high interest debt with a personal loan at a lower interest rate. This approach may enable you to reduce your monthly debt payments, which boosts your debt-to-income ratio and enables you to qualify for a higher mortgage amount. For example, if you replace a $650 monthly credit card bill with an 18% interest rate with a personal loan with a 9% interest rate and $325 monthly payment, this significantly increases the mortgage amount you qualify for.

If you decide to go with this option, we recommend that you apply for the personal loan several months before you apply for the mortgage. Applying for a loan can cause your credit score to dip temporarily, which can negatively affect your mortgage terms. Plus you want your new, lower monthly debt payments to be reflected on your credit report and ultimately your debt-to-income ratio.

Choose a Mortgage Program that Uses a Higher Debt-to-Income Ratio. Debt-to-income ratios vary by lender and loan program and typically range from 43% to 50%. In some cases lenders may apply a higher debt-to-income ratio for applicants with positive supporting factors such as significant financial reserves, a high down payment or income that is not reflected on their loan application.

The table below shows mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders to understand the debt-to-income ratio they use as you may find a lender that applies more flexible guidelines. Shopping lenders is also the best way to save money on your mortgage.

Choose a Low Down Payment Mortgage Program. There are multiple mortgage programs that enable you to buy a home with little or no down payment. If you select one of these programs you may be able to use a portion of the funds you were saving for your down payment to payoff some of your debt. For example, instead of making a 20% down payment, you use a low down payment program and only put 3% down.

Review Best Low Down Payment Mortgage Programs

This approach may enable you to payoff all or part of your debt and significantly improve your debt-to-income ratio. Although low down payment programs usually require you to pay mortgage insurance and impose loan or income limits which restrict your mortgage amount, they are potentially compelling mortgage options which may enable you to free up your funds to pay down your debt.

In sum, having high debt expenses may seem like an insurmountable hurdle when you apply for a mortgage. With a lot of discipline and a little creativity, however, qualifying for a mortgage and buying a home may be within your reach sooner than you think.

Sources

"B3-6-02, Debt-to-Income Ratios."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, February 5 2020.  Web.