Does a Mortgage Count As Debt?

If you have a mortgage on your home, you might be wondering whether a mortgage counts as debt. This post provides an in-depth explanation as to whether having a mortgage constitutes having debt.

Does a Mortgage Count As Debt?

Yes, having a mortgage counts as debt because you’re borrowing money from a financial institution to buy a home. Borrowing money to buy a home means that you’re indebted to a financial institution for repayment of money, which technically means that you’re in debt. When calculating your debt to income (DTI) ratio, you should include your monthly mortgage payment as part of your debt.

So, you might be wondering, why does having a mortgage count as debt?

A mortgage counts as debt because you’re essentially borrowing money from another party to buy your home, which makes mortgages fall under the definition of debt.

That said, mortgage debt is considered by many to be a good type of debt because you need a place to live, so borrowing money to buy a home is encouraged by many experts. It’s better than renting an apartment or home because rent money is permanently lost whereas a portion of the money that you pay for your mortgage goes toward paying off your home, so it’s not completely lost.

Even though a mortgage counts as debt, it’s considered as good debt because your home can appreciate in value, adding to your wealth. If you’re planning to keep your home for a long time, chances are that you will be able to profit from the appreciation of the value of your home.

Additionally, the interest rates on mortgages are significantly lower than those for credit cards and personal loans, making mortgages a great option for those who wish to buy a home. For example, it’s totally possible for a person to qualify for a 30-year mortgage at an interest rate of only 3%. On the other hand, if you take out a personal loan, your interest rate could range anywhere from 7% to 30%, making personal loans significantly more expensive than a mortgage.

What Are Some Other Items That Count as Debt?

Now that you know that your mortgage counts as debt, here are some other items that count as debt:

  1. Amounts owed on credit cards
  2. Auto loans
  3. Student loans
  4. Personal loans
  5. Any other types of debt that show up on your credit report

How to Calculate Your Debt To Income Ratio (DTI ratio)?

Calculating your debt-to-income ratio is fairly easy. To calculate it, you must add up all of your monthly debt payments and divide the total by your gross monthly income. Your gross monthly income refers to the amount of money your earn per month before deducting taxes.

For example, if you have total debt payments of $3,000 and you make $7,500 per month, your DTI can be calculated by dividing $3,000 by $7,500, giving you a DTI of 40%.

To calculate your monthly debt payments, you should include your credit card payments, mortgage payments, auto loan payments, student loan payments, child support payments, and any other type of debt payments.

So, you might be wondering, why does your debt to income ratio matter?

Your debt to income ratio matters because experts agree that people with a lower debt to income ratio are less likely to run into trouble when making their monthly payments on time. Typically, to be approved for a mortgage, the highest debt to income ratio that lenders will be willing to accept is a 43% DTI. If you have a DTI that is higher than 43%, you may still qualify for a mortgage but it will be more difficult to do so.

What counts as income for the purposes of your debt to income ratio?

  1. Salary
  2. Wages
  3. Tips
  4. Bonus payments
  5. Social security income
  6. Child support income
  7. Pension income
  8. Any other type of income

Can You Consider Yourself As Debt Free With a Mortgage?

No, you cannot consider yourself debt-free if you have a mortgage because having a mortgage by definition means that you owe another party money to buy your home. After paying off your mortgage, you can consider yourself debt-free.

Frequently Asked Questions (FAQs)

1. Is a mortgage classified as debt?

Yes, a mortgage is classified as debt because it falls under the definition of debt, which is owing money to another party. So, if you’re calculating your debt to income ratio, you should include your monthly mortgage payment when performing your calculations.

2. How does debt affect qualifying for a mortgage?

Typically, the more debt that you have, the less money you will be able to borrow. That said, mortgage lenders look at all of your finances, including assets, debts, and income when determining whether to approve you for a mortgage and the amount you may be approved for.

3. Should you pay off your debts before buying a house?

Paying off your debts can be great, especially before taking out a mortgage because it can reduce your debt to income ratio. Your debt to income ratio is considered by lenders when you apply for a mortgage. The higher your DTI, the less likely it is that you’ll be approved for a mortgage, and the lower the amount you could be approved to borrow.

4. Can I buy a house if I have a lot of debt?

Yes, you can still buy a house if you have a lot of debt, however, if your DTI is too high you may either be denied a mortgage or you might only be approved for an amount lower than what you need to buy the home you’re considering.