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Is Rent Considered Debt?

One of the conditions for getting pre-approved for a mortgage is to have a good credit score, which means that you should have as few debts as possible. However, many who are currently renting their places wonder – is rent considered debt?

Rent is not considered debt. Debt is defined as something you owe, typically money, that you must pay back with interest. Rent, on the other hand, is simply a payments made for the use of property or services. There is no obligation to pay rent beyond the current month or lease period, and there is no interest charged on rent payments.

Therefore, renting does not create debt in the same way that borrowing does.

People calculating a debt-to-income ratio

If you’re applying for a mortgage soon and need more detailed explanations on this topic, find all the answers you need in the article below.                          

Is Rent Considered a Debt? Rent is an Expense, Not Debt

Rent is usually viewed as a housing expense (such as utilities and other services) or long-term liability paid upfront for using a unit – it won’t be considered a debt unless it’s overdue. That’s how many people ask the following question: ”Does an apartment lease count as debt?” However, if you’ve missed even one rent payment and you owe money to your landlord, it becomes a debt.

Any kind of debt implies you need to repay a lender in full through a set monthly installment plan.

On the other hand, with renting, your obligation will terminate when you stop occupying the place – which will happen as soon as you get approved for a mortgage and use it to buy a new home.

Does Renting Affect Pre-approval of a Mortgage?

Once you apply for a mortgage, lenders must check your current financial situation in order to assess if you can qualify for some plans. That’s when you should know the right answer to questions like ”Is rent a debt?” and ”Does rent count towards debt to income ratio?”

The information they take into consideration concerns the income, available assets as well as credit scores – it will help them determine which loan to offer (if any) and under what conditions. The better your finances seem, the better mortgages you’ll be entitled to.

Renting can affect the mortgage approval, or, more precisely, meeting your rent each month or failing to do so can. While paying rent on time can help you build a credit score, not doing so can negatively affect your credit record and the chance of getting a wanted loan agreement.

Man holding a tiny home model while calculating mortgage expenses

What Is a Debt-To-Income Ratio, and Is Monthly Rent Included in It?

The most important indicator of a (un)healthy financial situation is your debt-to-income ratio (DTI). It’s a percentage that shows how much of your income goes to paying off debts and other expenses, such as:

  • Car payments,
  • Student and other personal loans,
  • Credit card payments,
  • Child support,
  • Homeowner’s insurance,
  • Monthly mortgage payments, rent, and so on.

As you can see, rent is technically included in the current DTI.

However, most lenders don’t calculate it when determining if you qualify for their plans. For lenders, rent is not a relevant expense since you’ll most likely move out of the rental after getting a mortgage and end this financial obligation.

Instead of focusing on your rent expenses, lenders will tend to calculate your new mortgage expenses, including future installments you’ll pay each month, property taxes, and other dues that expect you once you move.

Is Rent Included in Debt-To-Income Ratio?

When you apply for a mortgage, the lender will calculate your debt-to-income ratio based on your total monthly housing expenses. This includes property tax, anticipated mortgage payment, mortgage insurance, and homeowners association (HOA) dues. Your existing rent payment has no bearing on your debt-to-income ratio or your ability to obtain a mortgage.

What Is Acceptable Rent to Income Ratio?

Landlords should generally strive for a rent-to-income ratio that is not higher than 30%. This implies that the tenant should make three times the amount of the rent, at least. When the rent is higher than the monthly salary, tenants surely will have more struggles with paying off some essentials and covering certain living expenses. 

Can You Buy a Home If You Make High Rent Payments?

Most lenders prefer DTI not to be over 45% – borrowers with lower debt-to-income ratios are simply less risky. However, rents can launch this percentage even over 50%, especially high ones. Still, there is no reason to be worried.

Your mortgage application won’t be rejected based on the high rent you’re currently paying. Lenders only need to verify that you pay each rent on time – the money you spend on rent is not a deciding factor in the application process.

Mortgage being approved by a lender

Debt to Income Ratio for Renting an Apartment – Rent and Its Effects on Your Credit Score

While not all landlords will inquire about it, the DTI ratio is a crucial financial health metric that reveals whether you are spending within your means. What debt-to-income ratio is ideal? Most lenders prefer 36% or less, however, your landlord might have different requirements.

Although the money you spend on rent shouldn’t impact the mortgage approval process, rent can have a significant impact on your credit history. Late and missed rent will lower your credit score, which will make lenders perceive you as a risky borrower.

On the other hand, keep in mind that paying rent on time can help you build good credit, which is essential for meeting good programs and rates.

A credit score is a number that represents a person’s creditworthiness based on their current financial situation. The better score you have, the better mortgage conditions you should expect. Lenders usually use FICO scores – take a look at the table below to learn different credit score ranges and their probable implications on the future program:

Score by numberScore by descriptionImplications
<520WorstShows severe credit issues lenders won’t take the risk with
520-579Very poorUnlikely to qualify for a loan due to credit problems
580-619PoorWon’t be eligible for most loan programs
620-679Below averageMay qualify for some loans, but with very high interest rates
680-719AverageWill qualify for many loan programs, but with higher rates
720-739GoodShould expect little bit higher interest rates when applying
740-779Very goodEntitled to good interest rates
780-850ExcellentShould expect the best rates

If You’ve Met Your Obligation on Time, Don’t Worry about the Rent When Applying for a Mortgage

When getting into the process of buying a new home and applying for a mortgage, note that a lot of factors can affect your credit score – credit history length, amounts owed, and payment history are just some of them. But, is rent included in DTI for the mortgage? Rent, lickily, shouldn’t be one of the things to worry about. Still, if you spot that a lender has calculated it in your DTI ratio, make sure you contact the mortgage broker and get informed about the reasons.