Can You Buy a House with Debt? Mortgage Options Explained

You're carrying debt. Credit cards, medical bills, maybe a car loan. And you're thinking about buying a house. The two feel mutually exclusive. They're not.

Lenders approve mortgages for people with debt every single day. What matters is your debt-to-income ratio, your credit score floor, and which loan programs you know exist. Most borrowers assume they need a 700+ credit score and zero outstanding balances. In 2025, that's wrong.

Credit Score Floors Are Lower Than Banks Admit

Banks advertise 620 minimums for conventional loans. That's their comfort zone, not the actual floor. Mortgage brokers work with dozens of lenders, each with different risk appetites. Some will approve you at 540.

FHA loans: 580 minimum for most lenders, though some go to 600. These government-backed mortgages exist specifically for borrowers who don't fit conventional molds. Down payment as low as 3.5%.

VA loans: No minimum credit score requirement. If you're a veteran or active military, the VA doesn't set a floor. Individual lenders might, but many approve at 580 or below. Zero down payment required.

Conventional loans: 620 is standard, but portfolio lenders and credit unions sometimes go lower for borrowers with compensating factors like stable employment or large down payments.

Your credit score tells one story. Your payment history tells another. If you've been late on your mortgage or rent in the past 12 months, that's a bigger red flag than a 590 score with consistent on-time payments.

Your Debt-to-Income Ratio Is the Real Test

Lenders don't care how much debt you have. They care how much of your income it eats each month.

Calculate your DTI: Add up all monthly debt payments (credit cards, car loans, student loans, child support). Divide by your gross monthly income. Multiply by 100. That's your percentage.

FHA loans accept DTI ratios up to 50%, sometimes 57% with strong compensating factors. Conventional loans cap at 45-50%. VA loans can stretch to 60% if your residual income covers living expenses.

Example: You earn $5,000 monthly before taxes. Your debts cost $2,000 monthly. Your DTI is 40%. You qualify for most loan programs, assuming your credit score clears the floor.

If your DTI is too high, you have three moves: increase income, pay down debt, or wait. Paying off collections won't help unless those accounts are currently reporting monthly payments. Closed debts don't count toward DTI.

FHA Programs That Cover Down Payments and Closing Costs

The biggest barrier isn't debt. It's cash. Down payments and closing costs can total $15,000-$30,000 depending on your market. Most people with debt don't have that sitting around.

FHA offers programs where you put down less than $1,000 out of pocket. These aren't grants. They're structured deals using seller concessions and lender credits.

How it works: You offer asking price (or slightly above). Seller agrees to pay 3-6% of the purchase price toward your closing costs. Your lender provides credits to cover the remainder. Your down payment (3.5% for FHA) gets rolled into the loan structure through gift funds from family or nonprofit assistance programs.

Nonprofit programs like NACA (Neighborhood Assistance Corporation of America) and local housing finance agencies offer zero-down, zero-closing-cost mortgages for qualified buyers. You'll attend homebuyer education classes and work with approved lenders, but the upfront cost drops to nearly nothing.

For veterans, VA loans already require zero down. Combine that with seller concessions covering closing costs, and you're buying a house for under $500 out of pocket—just inspection and appraisal fees.

Investment Properties When You Already Have Debt

Buying a rental property with existing debt sounds backwards. It's not if the numbers work.

Lenders evaluate investment properties differently. They don't ask, "Can you afford another mortgage?" They ask, "Will the rent cover the mortgage?"

If market rent equals or exceeds the mortgage payment (principal, interest, taxes, insurance, HOA), lenders count 75% of that rental income as qualifying income. Your personal debt matters less because the property pays for itself.

Example: You buy a duplex for $300,000. Live in one unit, rent the other for $1,500 monthly. Your mortgage payment is $2,200. The lender counts $1,125 of that rent as income (75% of $1,500), reducing your effective housing payment to $1,075 for qualification purposes.

Your existing debt doesn't disappear, but the rental income offsets it in the DTI calculation. This is called "house hacking," and it's how people with marginal credit and moderate debt break into real estate investing.

You'll need stronger credit for investment properties,typically 620 minimum, 640 preferred. Down payments are higher too: 15-25% for non-owner-occupied properties. But if you're living in one unit, you can use FHA or VA loans with their lower down payment requirements.

Why Mortgage Brokers Beat Banks

Banks offer their own products. Mortgage brokers shop your application to 30-50 lenders. When you have debt, that access matters.

One lender might reject you at 585 credit with 48% DTI. Another approves it because they specialize in FHA loans for first-time buyers. You won't know which is which unless someone shops your file around.

Brokers don't cost you extra. They're paid by lenders, same as loan officers at banks. But they have no loyalty to a single institution, so they'll find whoever says yes.

Start by getting prequalified (not preapproved,there's a difference). Prequalification is a soft inquiry that doesn't ding your credit. You'll answer questions about income, debts, and assets. The broker tells you which loan programs you qualify for and what you can afford.

Once you're serious, you'll do a full preapproval with credit pulls and documentation. That's when you lock in your loan terms and get a commitment letter for sellers.

Should You Settle Debts Before Applying?

Maybe. It depends on the debt type and how it's reporting.

Collections in default: These hurt your credit score but don't affect your DTI if they're not requiring monthly payments. Settling them removes the credit score drag, but you might not need to if your score already clears the floor.

Credit cards with balances: These do count toward DTI based on the minimum monthly payment. Paying them down reduces your DTI, which expands your buying power.

Medical bills: These usually don't report to credit bureaus anymore (as of 2023, paid medical collections are removed, and unpaid collections under $500 don't appear). They won't affect your mortgage unless they turn into court judgments.

Judgments and liens: These must be paid or settled before closing. No lender will approve a mortgage with an active lien on your name. Negotiate settlements before you apply.

If you're on the edge of qualifying, settling high-balance debts first can tip the scale. Just make sure you're strategic: paying off a $200 collection won't help as much as knocking down a $10,000 credit card that's costing you $300 monthly in minimum payments.

When Bankruptcy Might Be the Smarter Move

If your debt is overwhelming and you're years away from qualifying, bankruptcy resets the clock faster than slow paydowns.

Chapter 7 bankruptcy requires a 2-year waiting period before you can get an FHA or VA loan (4 years for conventional). Chapter 13 requires 1 year into your repayment plan with court approval (2 years for conventional after discharge).

Compare that to the alternative: spending 5-7 years slowly paying off $50,000 in credit card debt at 24% interest while your credit score stays in the 500s. You're underwater longer, and you're not building equity in a home.

Bankruptcy sounds scarier than it is. Lenders care more about what you've done since filing than the filing itself. If you've rebuilt credit, stayed employed, and kept clean payment history for 2 years post-discharge, you're often a better bet than someone still juggling maxed-out cards.

That doesn't mean bankruptcy is right for everyone. But if you're asking whether you should wait 5 years to save for a house or file bankruptcy and qualify in 2-3, the math often favors the latter.

What to Bring When You Apply

Lenders need proof of everything. Gather these before you start shopping:

• Two years of tax returns (all pages, all schedules)
• Two months of pay stubs
• Two months of bank statements for all accounts
• List of all debts with account numbers and monthly payments
• Proof of any additional income (child support, VA disability, rental income)
• Letter of explanation for any credit issues (late payments, collections, bankruptcies)

If you're self-employed, add two years of profit and loss statements and business bank statements. If you've changed jobs recently, bring an offer letter or employment verification.

The more documentation you provide upfront, the faster underwriting goes. Surprises slow everything down.

Markets Where This Strategy Works Best

Buying a house with debt makes more sense in markets where rents equal or exceed mortgage payments.

Check your local rent-to-mortgage ratio: Find a comparable home for sale and a comparable rental. If the rental costs more than the mortgage (PITI + HOA), buying makes financial sense even with existing debt.

In high-cost cities like San Francisco or New York, this math rarely works. Mortgages far exceed rents, and you need six-figure incomes to qualify. But in Midwest metros, Sunbelt cities, and smaller markets, buying beats renting even when you're carrying $20,000 in credit card debt.

Your mortgage payment stays fixed (assuming you get a fixed-rate loan). Your rent goes up 3-5% annually. Over 10 years, that gap becomes massive.

The Path Forward

You don't need to be debt-free to buy a house. You need a plan.

Start by checking your credit score and pulling your full credit report (free at AnnualCreditReport.com). Identify what's hurting you: late payments, high balances, collections, or just a thin file.

Calculate your DTI. If you're over 50%, focus on paying down high-interest revolving debt or increasing income. If you're under 45%, you're in good shape for FHA or VA loans.

Talk to a mortgage broker, not a bank. Ask about FHA, VA, and assistance programs in your state. Get prequalified to see what you can afford. Then decide whether to settle debts first or move forward as-is.

The housing market doesn't wait for perfect credit. If you wait until every account is paid off, you'll miss years of equity growth and pay tens of thousands more in rent. Sometimes good enough is better than perfect.