Definition:
Installment debt is a type of loan that is repaid over time with a set number of scheduled payments, usually monthly. Common examples include mortgages, car loans, and student loans.
Example:
Carlos has a student loan with a $200 monthly payment and a car loan with a $350 monthly payment. These are both examples of installment debt because he pays them in fixed amounts each month over a specific period.
Explanation:
In real estate, installment debt plays a key role in the mortgage approval process. When buyers apply for a home loan, lenders review all of their current debts—including installment debt—to calculate their debt-to-income (DTI) ratio. This helps lenders determine if the buyer can afford to take on a mortgage in addition to their existing financial obligations.
Unlike revolving debt (like credit cards, where the balance and payments can vary), installment debt has a clear start and end date, with consistent monthly payments. The total balance is paid down gradually with each payment.
Examples of installment debt include:
- Home mortgages
- Auto loans
- Personal loans
- Student loans
These debts are reported on a borrower’s credit report and impact their credit score and borrowing capacity.
Why is Installment Debt Important in Real Estate Transactions?
Installment debt is important because it directly affects a buyer’s ability to qualify for a mortgage. Too much debt—even if it’s being paid on time—can limit how much a buyer can borrow or even result in a loan denial. For sellers, understanding that a buyer’s installment debts are part of the financing puzzle helps explain why loan approvals may take time or fall through. Lenders use installment debt to gauge risk and ensure borrowers aren’t overextending themselves financially.