Trying to procure mortgage credit right now? From higher interest rates, to rising house prices to the contraction in buying power, securing financing, for many can prove to be no easy endeavor. As prices, and rates rise in tandem, lenders will still place the weighted emphasis on “real income” as that’s what the mortgage loan is truly made against…
Terms To Know
DTI (debt to income) : represents the total amount of monthly debt payment (+total house payment) divided into monthly income. Whenever this number exceeds 45% of the gross monthly income, things get dicey.
Real Income: also known as “qualifiable income” net income considered for the housing payment after present liabilities are factored in. For example $5,000 monthly income × .45% is $2,250 as a total debt allowance. Less any current liabilities for example $250 per month, means real income is $2000 per month. Real income is equivalent to a proposed housing payment.
Debt: refers specifically to the minimum payment obligations consumer is liable for. Has nothing to do with total amount of debt, but rather what the monthly payments are. Lenders are looking for cash flow, how much or how little of it there is.
*Tip: Debt erodes income (ability to borrow money) at ratio of 2:1, takes $2 of income to offset $1 of debt
Paying Off Debt To Qualify Differs From Home Buying To Refinancing
Home Buying- paying off debt to qualify is simply a function of learning how much more in purchase price is achievable if the debt was eliminated. A mortgage company can run scenarios like this showing you “what if” possibilities which could be crucial in your endeavor to purchase not only the right home, but ultimately the home that you can afford.
Let’s say for example, there’s $6000 left on a car loan, you have the cash in the bank and the car loan payment is $600 per month. $600 per month on a car loan reduces your ability to purchase to the tune of over $100,000 in loan amount.
Consider the following….
$100,000 at 4.5% on a 30 year fixed rate mortgage translates to $506 per month, $94 per month less for more advantageous debt.
*How To Pay Off The Debt & Still Meet The Lending Credit Standard-paying it off pre-contract, simply inform your mortgage company and they can do a third-party validation to omit the debt. Paying it off during the loan process, monies will have to be sourced and paper trailed, little more technical, but permitted. Same goes for credit cards and other payment obligations.
Refinancing- When you refinance a mortgage and you pay off debt to qualify, lenders going to require the credit obligations such as credit line or credit card’s for example be paid off in full and closed to prevent the future possibility of further debt accumulation thus impacting the future debt to income ratio as well as the future ability to repay.
Paying off debt to qualify when refinancing will vary from lender to lender as to their specific approaches, but generally the accounts will have to be closed as well. Nothing, however, prevents you from reapplying for credit after the mortgage has closed.
*How To Pay Off The Debt & Still Meet The Lending Credit Standard -monies similar to a purchase transaction will have to be sourced, as well as proof the obligation has been closed. Tip: if possible, payoff the credit card in full, learn the date the creditor reports to the bureaus, then apply for the mortgage after the creditor has reported to the bureaus, doing this will show the updated balance on the credit obligations which will improve real income ( by showing less debt), making the process more streamlined.
If you have debt that otherwise could be eliminated and have the means to pay off the debt, strongly consider doing so as higher credit risk mortgages, tend to be quite pricey overall, compared to lower debt to income ratio credit profiles.
Want to learn more how debt removal can improve your ability to buy or refi a home? We can run purchase and/or refinance scenarios help you accomplish your long-term payment and cash flow objectives. Start today by getting a complementary mortgage rate quote.