Definition:
Liabilities are a person’s or business’s financial obligations—what they owe to others. In real estate, liabilities include debts like credit cards, auto loans, student loans, and existing mortgages that impact a buyer’s ability to qualify for a new loan.
Example:
Before approving Carla’s mortgage application, the lender reviews her financial profile. She has $15,000 in student loans, a $10,000 car loan, and $2,000 in credit card debt. These are considered liabilities and factor into how much she can borrow for a home.
Explanation:
Liabilities represent anything you owe and are the opposite of assets (what you own). Lenders look closely at a buyer’s liabilities when evaluating mortgage applications because they want to know how much debt the borrower already carries.
The total amount of liabilities helps determine a borrower’s debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income. A high DTI ratio suggests the borrower may have trouble managing additional debt, making mortgage approval more difficult.
Common liabilities include:
- Credit card balances
- Auto loans
- Student loans
- Medical debt
- Personal loans
- Existing home loans or rental obligations
These liabilities are reported on a credit report, which lenders use to assess a buyer’s financial health.
Why is Liabilities Important in Real Estate Transactions?
Liabilities are important because they directly affect mortgage approval and loan terms. For buyers, understanding and managing liabilities can improve credit scores, reduce monthly debt, and increase borrowing power. For sellers, knowing that a buyer’s financing depends on their liability profile helps set realistic expectations. In any transaction, liabilities play a major role in determining whether a buyer is financially prepared to purchase a home and how much they can afford.