|Debt obligations directly linked to borrowing power
Sonoma County mortgage rates are quite low. In fact, locking in a 30-year fixed rate mortgage around four percent is pretty common these days. Whether purchasing or refinancing, securing the best mortgage rate is on everyone’s mind. However, while getting the lowest rate is certainly an admirable goal, qualifying for that mortgage loan becomes 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 monthly debt obligations are beyond the comfort level of
the mortgage lender lending you the money. 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 lender how much that credit card payment is affecting your ability to borrow a certain amount of dollars. 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 each at $50 per month. 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 and gives you the control over where that money goes every month 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. Many student loans are government issued, making the cost of refinancing prohibitive because the fact government issued student loans contain extremely low interest rates.
• How lenders view installment loans: Lenders use the minimum monthly debt payments as reflected on the credit report. Installment loans are the oddball 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. Installment loans when coupled with credit card payments and auto loans can significantly reduce the amount of money you’d otherwise be eligible to borrow and qualify for.
• 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. Auto loans can range anywhere from $100-800 per month.
The car payment is just a lease; I don’t own the car. Does it show up on your personal credit report? Is the monthly payment on your personal credit report? Then the lender must account for that debt payment, lease or not.
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 on 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? Lenders use personal loans reported on the credit report only.
This goes with any monthly debt obligations that will be reported to the credit bureaus. 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. Because these debts are revealed on the tax return, lenders will look for these when analyzing your tax returns for income and/or losses to determine loan qualifying.
Unfortunately, there isn’t really a solution to reducing or eliminating the burden of the obligation to make a timely child support payment especially when trying to qualify for mortgage loan financing, unless you have a court order. If you are receiving child support income, this is a good thing because that additional income can be used in consideration for helping you qualify for the loan. Just make sure the child support payments will continue through the close of escrow on the property you are purchasing or through the refinance escrow process.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.