Unlocking Better Mortgage Terms

By Realty Times Published Jun 24, 2025 05:15 am

In today’s housing market, securing favorable mortgage terms can be challenging, especially for buyers who already carry debt. With high home prices and fluctuating interest rates, lenders are closely scrutinizing borrowers’ financial health. And many aspiring homeowners worry that having debt hurts their chances of getting a good mortgage.

Fortunately, that’s not always the case. While debt does influence mortgage financing, you can still qualify for competitive loan terms with the right strategy.

How debt affects mortgage terms

Carrying debt doesn’t disqualify you from securing decent mortgage terms, but it does affect how lenders evaluate your application. They consider factors like your credit history, monthly debts, income and payment habits to assess the risk of lending to you. More debt typically means more risk, which can lead to higher interest rates or even loan denial. It also impacts how much you can borrow.

Strategies to improve your mortgage terms

While your debt is a critical factor in home financing, there are actionable steps you can take to improve your standing.

Improve your credit score

Lenders use your credit score to evaluate how you manage debt. A higher score can lead to lower rates, fewer fees and better loan options.

To maintain or improve your credit score:

Make all payments on time. Your payment history significantly impacts your credit score; just one late payment can lower it. Prioritize staying on top of recurring payments, including credit cards, loans and utility bills.
Avoid new debt. Opening new credit accounts or financing large purchases before applying for a mortgage will increase your total debt and lower your average account age, which can reduce your score.

It’s a good idea to view your credit reports before seeking a mortgage preapproval and dispute any errors immediately. You can request them from each of the three major credit bureaus for free at annualcreditreport.com. Improving your credit history and score even by a few points can make a meaningful difference in your loan’s interest rate, potentially saving thousands over the life of your mortgage.

Lower your debt-to-income ratio

Your debt-to-income (DTI) ratio is the percentage of your gross monthly income that goes toward debt and is a key factor that lenders consider when evaluating mortgage applications. Generally, lenders prefer a DTI ratio below 41% (including your mortgage), though some do accept higher, depending on the loan program and other strengths in your financial profile.

To calculate your DTI ratio, add all monthly debt payments (e.g., rent, car loans, student loans, credit cards, etc.), then divide the total by your gross (pre-tax) income.

Example: $2,300 total monthly debt ÷ $6,000 income = 38% DTI.

To reduce your DTI ratio:

Pay down debt, especially high-interest debt like credit cards.
Increase your income through side work, bonuses or overtime.
Include all verifiable income sources in your application.

Shop around for lenders

As with shopping for a home, finding the right lender is critical. Not all lenders offer the same rates or loan programs, and even a slight difference in interest rate can save thousands of dollars over the life of your loan. Research from Freddie Mac shows that borrowers who get at least four rate quotes can save more than $1,200 annually.

When comparing lenders, pay close attention to:

Interest rates and APR
Loan origination and closing costs
Preapproval processes and customer service

Mortgage brokers can help you access a broader range of lenders, especially if you have a unique financial situation.

Compare loan options

In addition to comparing lenders, review different mortgage programs and loan options. Understanding these variables can help you secure more favorable terms.

● Mortgage programs: Conventional loans offer competitive terms but require higher credit scores and a lower DTI ratio. FHA loans are more lenient on credit and debt but may include higher fees. VA and USDA loans provide favorable terms and low or no down payments for those who qualify.

● Interest rate structure: Fixed-rate loans provide stability; adjustable-rate mortgages (ARMs) start with a lower rate but can increase.

● Loan term: Mortgages typically have repayment terms of 15 or 30 years, although some lenders offer customizable options. Shorter terms often have lower rates and less interest but higher monthly payments than longer terms.

Increase your down payment
Another strategy to improve your mortgage terms is to increase your down payment above the minimum requirement for your loan program. When you contribute more upfront, you lower the loan-to-value (LTV) ratio, which reduces the lender’s risk. This can help you qualify for:

Lower interest rates
Better loan terms
No private mortgage insurance (PMI) if your down payment is 20% or more on a conventional loan

Sources for down payment funds can include personal savings, gifts from family (with appropriate documentation) and down payment assistance programs. However, it’s important to avoid depleting your savings. Lenders may also want to see that you have cash reserves for unexpected expenses.

Additional tips for better mortgage terms

If you’re carrying debt, consider buying discount points — a one-time fee (typically 1% of your loan amount per point) to lower your interest rate. A small reduction, like 0.25%, can lead to substantial savings over a 30-year loan, especially if you plan to stay long-term.

Another option is a temporary mortgage buydown, which reduces your rate for the first few years. This can help if you expect your income to increase or debt to decrease soon. Discuss these options with your lender and real estate agent to determine what’s best for your situation.

Picking a strategy

Debt doesn’t mean you’re out of the running for a good mortgage — it just means you need a plan. Whether it’s improving your credit, lowering your DTI or comparing lenders, focusing on even one or two strategies can boost your chances of securing a more affordable mortgage.