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How to manage a mortgage as debt levels reach record

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Consumer debt exceeded $16 trillion for the first time as of the second quarter of this year, according to figures from the Federal Reserve Bank of New York. For mortgage borrowers, more debt, combined with higher interest costs, means bigger monthly payments and shrinking affordability.

How much debt is there?

Overall household debt jumped past $16 trillion in the second quarter of 2022, encompassing everything from car loans to credit cards, the New York Fed recently reported. Mortgage debt, specifically, has risen by nearly $1 trillion in the past year:

Debt type Balance totals Annual change Q2 2021-Q2 2022
Source: Federal Reserve Bank of New York Quarterly Report on Household Debt and Credit, Q2 2022
Mortgages $11.39 trillion Up $945 billion
Home equity lines of credit (HELOCs) $320 billion Down $3 billion
Student loans $1.59 trillion Up $19 billion
Auto loans $1.5 trillion Up $87 billion
Credit cards $890 billion Up $100 billion
Other (e.g., retail cards) $470 billion Up $49 billion

Meanwhile, mortgage rates are also much higher than they were a year ago:

The upward trend comes amid 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 driven average new monthly mortgage payments up this year by 53.7 percent, from $1,265 to $1,944, NAR’s June Housing Affordability Index shows.

At the same time, inflation has made goods more expensive, and wages haven’t kept up. In the last year, the median household income rose by just 5.8 percent, NAR reports.

For many households, the squeeze is on, with prices too high and incomes too low to maintain old standards of living. The result? More debt for American households.

How debt factors into getting a mortgage

Debt is of great concern to mortgage lenders, who measure a borrower’s debt-to-income (DTI) ratio to verify ability to repay the loan. The DTI ratio includes the projected mortgage payment and all other debt payments — student loans, for instance. Too much debt, and you might be unable 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 assess a “front end” ratio, which looks solely at the housing payment — mortgage principal, mortgage interest, property tax and property insurance (PITI) — against gross monthly income.

Different loan programs have different front end and back end (DTI) ratios:

  • Conventional loans: No more than 28 percent front end and 36 percent back end
  • FHA loans: 31 percent front end, 43 percent back end
  • VA loans: 41 percent back end
  • USDA loans: 29 percent front end, 41 percent back end

These ratios aren’t set in stone, however. Borrowers with “compensating factors,” such as a high credit score or lots of cash, might 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 percent.

How to qualify for a mortgage with more debt

If you’re like the many Americans who’ve taken on more debt recently, you might need to adjust your financial habits to still be eligible for a mortgage. Start by:

  • Revisiting your monthly budget – If you took on a new loan (or multiple) in the past year, take stock of where you’re now spending your dollars. If your income hasn’t grown, you might find you have less room in your monthly budget for a mortgage payment than planned. To get an idea of where you might stand now, input your debt payments into Bankrate’s how much house can I afford calculator.
  • Paying down what you can – While you can’t control the cost of groceries, you might be able to cut back during inflationary times in other ways, like lowering your energy usage or cutting discretionary expenses such as clothing or subscriptions. You can then funnel those savings toward paying down debt to lower your DTI ratio. You might choose to attack credit card debt, begin with the loan that has the highest monthly payment or one of these other debt payoff strategies.
  • Looking into down payment assistance – About a third of denied 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’re eligible, a down payment assistance program could help you get the funds you need to compensate for 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 debt

If you already have a mortgage and have taken on more debt, now is the time to reevaluate your finances, especially with the uncertainty in the economy. Here are three tips:

  • Establish a cushion – If possible, prioritize emergency saving and ensure you have at least three months’ worth of mortgage payments in the bank. The interest rates on savings accounts have increased as of late, so explore high-yield options to maximize what you put in.
  • Avoid excessive credit card charges – Resist the temptation to dig yourself deeper 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 might give you some breathing room. Keep in mind, however, this is another loan that needs to be repaid.
  • Reach out to your mortgage servicer – If the worst happens and you know you won’t be able to make your mortgage payment, get in touch with your servicer as soon as possible. If the hardship is temporary, you might be offered a forbearance plan that’ll give you a break on payments.
Written by
Peter G. Miller
Contributing Writer
Peter G. Miller is a contributing writer at Bankrate. Peter writes about mortgage rates and home buying.
Edited by
Mortgage editor