In a November article in the Niche Report posted by Scott Sheldon, we are given insight into how we are viewed as potential borrowers:
“Whether purchasing or refinancing, securing the best mortgage rate is on everyone’s mind. However, while getting the lowest rate is certainly the target, qualifying for that mortgage loan become something else entirely when you factor in the amount of income needed to offset the new house payment and the usual reoccurring monthly debt obligations that typically arise after reviewing credit and tax returns.
The lowest and best mortgage rate is going to be of no value to you as a borrower if your debt obligations are beyond the comfort level of the lender. Following are the common debt obligations that limit purchasing power, or should we say borrowing power for the purposes of securing a home loan.
How lenders view credit card payments: Lenders use the minimum monthly payment as reflected on the credit report they pull when qualifying you for the home loan.
You make more than the minimum monthly payment right? Well that’s great, but the lender doesn’t care.
They will be using what you are responsible for as evidenced by your credit report.
Solution: Ask the mortgage company how much that credit card payment is affecting your ability to borrow your desired loan amount. For example many credit card payments can be as little as $50 per month, but that can add up rather quickly if you have multiple credit cards totally much more.
Can you pay the credit cards off in full? Consider the possibility of using part of your down payment to pay off the credit card debt. Whether you bought a home now or waited, paying off that debt frees up that cash, giving you the control over where that money goes rather than having the money be predetermined by a creditor.
*How lenders view student loans: Lenders will use the minimum monthly payment on a credit report just like on credit cards. Even, if the payment is deferred, the lender will use the future payment in qualifying you for the home loan.
Solution: The best solution other than paying these debts off, if possible, would be to refinance them.
*How lenders view installment loans: Lenders use the minimum monthly debt payments as reflected on the credit report. Installment loans are the odd ball variety of financing, because they encompass items such as trailers, and even household items such as generators or personal motors.
Solution: Refinance them or pay them off in full.
How Lenders View Auto Loans: Lenders will use the payment reported on your personal credit report as the minimum debt obligation for loan qualifying. Auto Loans are the most common types of larger monthly debt obligations that significantly reduce borrowing eligibility.
Solution: Pay them off in full or refinance them. If it means not being able to purchase a house because you have an auto loan, can you sell the car and get a different car and still qualify for financing? Talk with a lender. Most lenders will agree that auto loan payments can affect one’s ability to borrow as much as $40,000 in loan amount.
How Lenders View Personal Loans: Lenders will use the minimum monthly payment you’re obligated to make a monthly basis as reported on…..yep you guessed it, the credit report. If you must take out a personal loan, can you do it after the close of escrow?
√Mortgage Tip-This goes with any monthly debt obligations that will be reported to the credit bureau’s. Take them out after you purchase or refinance. Doing so ensures you will get the best and lowest mortgage rate available as assuming credit, income and rest of your finances allow you to qualify.
Solution: Beyond paying them off, the next best solution is to refinance the personal loans or just let the lender use it as a debt obligations when determining your ability to qualify for the mortgage loan.
How Lenders View Child Support: Lenders use the amount of payment you’re obligated to make based upon your income tax returns and/or a divorce decree or a settlement agreement or a separate child support agreement.
How Lenders View Alimony: Lenders will use the amount provided a divorce decree or on your personal income tax return.
How Lenders View Mortgages: Lenders don’t just take into consideration mortgage principal and interest payments, they take into consideration the principal and interest payments on whatever mortgage you presently have, along with any property taxes, monthly fire insurance obligations or homeowners association obligations you may have tied to the property plus other reoccurring debt obligations against your monthly income.”
Though these are valuable insights, each lender has different requirements, and you should consult with your mortgage professional to discuss your particular situation and goals.