Mortgages

The Right Way to Pay Off Debt to Get a Mortgage

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Trying to secure a mortgage right now? From higher mortgage rates, to rising home prices to the contraction in buying power — securing financing, for some, can be no easy endeavor. As prices, and rates rise simultaneously, lenders will still place the weighted emphasis on “real income,” or, the amount of monthly payment you can afford — as that’s what the loan is truly made against. Unfortunately, the amount of debt you have effectively chips away at your “real income.” So before you try to get a mortgage, you might want to pay down your debt. Just make sure you do it the right way.

Before I delve into the specifics, here are some quick terms you need to know:

  • Debt to income ratio (DTI): Represents the total amount of monthly debt payment (including the house payment) divided into monthly income. Whenever this number exceeds 45% of the gross monthly income, things get tricky.
  • Real Income: Also known as “qualifiable income,” the net income considered for the housing payment after present liabilities are factored in. If you have $5,000 in monthly income × .45, that gives you $2,250 as a total debt allowance. If your other debts total $250 per month, that means your real income is $2,000 per month. Real income is also equivalent to a proposed housing payment.
  • Debt: Refers specifically to the minimum payment obligations the consumer is responsible for. This has nothing to do with the total amount of debt, but 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 a ratio of 2:1; it takes $2 of income to offset $1 of debt.

Now, the strategy for paying off debt to qualify differs when buying a house from refinancing. Let’s look at the differences:

Paying Off Debt When Buying a Home

When buying a home, and prior to attaining an accepted purchase offer, paying off debt to qualify is simply a function of learning how much more buying power is achievable by eliminating debt like credit cards, student loans or car loans.

A qualified mortgage lender can run “what if” possibilities, which could become crucial in your endeavor to purchase not only the right home, but ultimately the home you can afford. Let’s say there’s $5,000 left on your 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 more than $100,000 in loan amount. Consider this: A $100,000 mortgage loan at 4.5% on a 30-year fixed rate mortgage translates to $506 per month, $94 per month less than if you didn’t have the debt. If you pay off the debt in full, your DTI is reduced, improving your ability to qualify and increasing your real income.

How to Pay Off the Debt and Still Meet the Lending Credit Standard

If you’re paying it off pre-contract, simply inform your mortgage company and they can do a third-party validation and the debt can be omitted. When paying off during the escrow process, monies will have to be sourced and paper trailed, which is a little more technical, but still achievable. The same goes for credit cards and other payment obligations.

Paying Off Debt When Refinancing

When you’re refinancing, the lender’s going to require that your credit obligations — such as a car loan or credit card — are paid off in full and closed to prevent the possibility of your accumulating further debt, thus potentially affecting your ability to repay in the future. Moreover, the lender would call for an escrow account to pay off the debt through the loan closing.

When it comes to paying off debt to qualify in refinancing, different lenders will vary on their specific approaches. Generally, though, the accounts will have to be closed as well. That won’t prevent you from reapplying for credit after the mortgage has closed, however.

How to Pay Off the Debt and Still Meet the Lending Credit Standard

The monies you use to pay off your debt, similar to a purchase transaction, will have to be sourced — and you’ll have to have proof that the obligation has been closed. If possible, pay the credit card in full, learn the date the creditor reports to the bureaus, then apply for the mortgage after the creditor has reported it to the bureaus. Doing this will show the updated balance on the credit report, which will improve real income (revealing 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 more pricey overall — compared to those for borrowers with lower debt-to-income ratios and better credit scores.

As you get ready to buy a house or refinance your mortgage, it’s important to pull your credit reports and credit scores to see where you stand. You can get your credit reports for free once a year from each of the three credit reporting agencies, and you can monitor your credit score using a free tool like Credit.com’s Credit Report Card.

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  • Val Croft

    Scott,
    We have just closed on a home refi with a cash out option to pay off about $10,000 in credit card debt. FYI our debt to income ratio is approx 22%. Four days after we closed our credit union is asking that I sign forms to close my credit cards. This was never disclosed as a condition to the loan, my documentation with the credit union shows payoff only. I am not comfortable with closing my 2 credit cards. What are my options? Thanks so much.

    • http://www.credit.com/ Credit.com Credit Experts

      From Scott Sheldon:

      First off congratulations being able to keep your debt loads low, a 22% debt
      to income ratio is fantastic! Cash out refi usually does not have an
      option to pay off credit cards but rather happens in one of two ways.
      The first way is that you did receive a $10,000 cash after-the-fact and
      then in it becomes your choice to pay off the credit cards or, it was a
      requirement of the loan to pay off debt to qualify which is what it
      sounds like wherein these credit cards would’ve been paid off through
      the close of escrow. It sounds as if that’s what transpired based on
      your description. If the loan was set up with you paying off the credit
      cards and a credit union was notified, you might want to ask your credit
      union since the refi has already happened if you can keep the cards
      open. Otherwise, you may have to close the cards and then reopen them
      after-the-fact. Hope this helps!

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  • ScottSheldonLoans

    Hi Dave,

    Because you are a sole proprietor is little bit different.
    You need to show the business debts are paid for by the business, identified on
    your schedule C. If they are not paid by the business then they become a
    personal liability and they will affect your debt to income ratio in that
    particular instance. Your personal debts for $500 per month, would need to be
    paid off prior to closing escrow and would have to be subsequently closed in
    order for the lender to not account for the $500 per month liability against
    your income. The key here is that it has to be paid off and closed in can’t
    just simply be paid off because the credit line would remain open which would
    further mean you could accumulate debt again. After-the-fact, you could always
    open up a credit card again anyway. Hope this helps with your situation.

  • ScottSheldonLoans

    Yes, you would need to provide a lien release from the lender because it’s not been report to the credit bureaus that quickly.

  • JJ

    Hi Scott, How long do I have to wait in order to apply credit after the escrow is closed??? I’m trying to buy some new furniture for my new home

    • ScottSheldonLoans

      JJ,

      Good question, as soon as escrow/transaction “records” , you’re good.

  • Amy

    Hi Scott, great info! Quick question- We are pre-ratified contract and completed pre-qualification and approval for mortgage. Loan officer today said our DTI is great until they run the “worst case scenario” of Max 2% increase in 5 years after 5yr fixed rate. We discussed several options and I was told lowering our monthly car payment would improve our ratio. I was concerned about having credit pulled to refi car loan or purchase car with lower payment & was told that would not be an issue since credit was already pulled its valid for 4 months. Does this seem accurate? I’ll gladly get a lower car payment.

    • ScottSheldonLoans

      Amy,

      Thanks for the question sounds like you are taking an arm loan, am I right? If yes, and the DTI has a chance of being too high sounds like maybe you are qualifying on the teaser rate to squeeze in? If yes, I would really invest the time to make sure you all all the faucets your lender is working with. A credit report for mortgage purposes is good for 60 days after which if the loan hasn’t closed they’d need to repull credit. A new car loan cause a debt to income issue if its a new car loan or the payment is higher. Generally, a credit pull for a car loan won’t adversely affect your score and could improve your debt to income ratio especially ( lowering dti) if the car payment is lower. My advice? Ask your loan professional what the car payment would need to be to keep your debt to income ratio in safe range and consider a 30 year fixed. I tell home buyer’s if you cannot afford a 30 year fixed rate payment with taxes and insurance, then don’t buy the house or reduce your price range to a payment more in line with your income and liabilities. Good luck out there!

  • ScottSheldonLoans

    Hi there,

    I would pay off the car, as the car probably has the largest
    minimum monthly payment due.I could be wrong, but in my experience car
    payments are substantially more than a credit card payment or even a student
    loan payment. Since the reality of it is that you’re going to be purchasing a
    home with some form of consumer debt the key here is to do it with as
    lowest possible minimum monthly payments on consumer liabilities as possible
    which means getting rid of the car- translates to the biggest bang for your buck in terms
    of borrowing ability. I wouldn’t worry too much about your credit score
    dropping by paying off the car either. Once the car payment is gone, that
    payment can go towards saving up for the monies to buy a home or for doing
    exactly what you mentioned, paying off consumer liabilities.

  • http://www.Credit.com/ Gerri Detweiler

    The problem with rolling those loans into a mortgage is that a. you’ll take much longer to pay them off and b. you are putting your home at risk for consumer debt. If you can’t pay your credit card or auto loan, they can’t take your home. But if you can’t pay your mortgage, you could lose the roof over your head.

  • http://www.Credit.com/ Gerri Detweiler

    A personal loan could be a good idea. If you can get a loan at a decent fixed rate and then pay the $500 a month you were paying on your car toward this debt it sounds like you could pay it off in about 48 months. If you decide to buy a home during that time, the payment on that loan will figure into your debt ratio, but so would your credit card payments if you left the debt on your cards. If you can add the amount that you are currently pain in your credit card to the loan payment you may be able to pay it off even faster. You can search personal loans here.

  • http://www.Credit.com/ Gerri Detweiler

    Ashleigh,

    Are you taking out federal student loans or private student loans? Federal student loans are much safer generally than private loans.

    The other question is whether you are building any kind of savings. Are you able to set any money aside or using it off pay off the car loan?

  • http://www.Credit.com/ Gerri Detweiler

    Megan,

    Your best bet is to talk with a mortgage professional who can look at all of your information to see if you’re ready to qualify. However, I would caution you about trying to take on new debt when you aren’t currently paying your student loan debt. To have a plan for tackling this debt when it is out of deferment?

    I’d also suggest you read this article: How Student Loans Can Hurt Your Mortgage Application

  • ScottSheldonLoans

    Sean yes you will. Once the UW see its, they cannot just ignore it.

  • http://www.credit.com/ Credit.com Credit Experts

    We wish there were an easy answer to your question. Delinquent accounts stay on your credit report for 7.5 years after the original account was reported late. Repaying the debt doesn’t make it disappear from your credit report, unfortunately. You can and should keep an eye on your scores to make sure you are on track. Here’s how to monitor your credit score for free.

    You’ll find more information here:
    How to Fix Your Credit Score When Buying a Home

    The First Thing to Do Before Buying a Home

  • http://www.Credit.com/ Gerri Detweiler

    Nancy – Did you talk with your loan officer about this strategy? If you have an experienced loan officer they should be able to provide some direction. After all, that’s how they get paid is by making loans!

  • ScottSheldonLoans

    Nancy,
    Yes,you should be able to take the monies in your bank account and use those to pay off debt to qualify. However before you do that, if your debt ratio is literally only 45.1, try to get the interest rate lower with the lender .125% or get the hazard insurance reduced. One of those directions might be faster, and easier and you don’t need any of your own cash typically to do that unless your pain discount points to purchase the interest rate down .125%. That’s probably a better direction to take because lenders still allow loans up to 45% debt to income/payment income ratio.

  • ScottSheldonLoans

    You guys can pay off those liabilities and apply for a mortgage within just a few short weeks of doing so just make sure to tell the lender that you just did this action that they might have to do with color rapid rescore where they get your credit score changed by virtue of paying off previous liabilities.

  • ScottSheldonLoans

    Hi there no the plan won’t be considered, the debt would need to be paid off if that’s a hold back from loan approval.Can’t count his income for qualifying unless he is on the loan.

  • ScottSheldonLoans

    All the lender can do is give you suggestions to reduce the debt to income ratio. If they’re trying to reduce the debt to income ratio and the lease payment will fix that, then all they need is documentation to show the lease is no longer in effect and that you guys own title to the car without the obligation to make payments on it to the creditor.

  • http://www.Credit.com/ Gerri Detweiler

    It is perfectly fine to pay off your student loans. They won’t disappear from your credit reports when they are paid off, and if they had on-time payments those will still help the overall credit score.

  • http://www.credit.com/ Credit.com Credit Experts

    Possibly. Prices vary widely, and it would also depend on your credit. You’ll want to check your credit reports for accuracy. Here’s how to get your free annual credit reports. And you can also get free credit scores from Credit.com. That way, you’ll have an idea of where you stand credit wise.

  • LittleBritches

    I want to buy a home, I tried to pre-qualified but the lender said I had some old debt/collections agencies on my report. That I would have to pay them off before they would make any loans. I checked my report and most of them are zombie debt agencies collecting on debt that is over 6-10 yrs old. Some are schedule to “fall off” my credit report in 3 months to a 1 yr. One one account it has been sold 4 times!! What do I do?

  • http://www.Credit.com/ Gerri Detweiler

    It’s great that your fiance is making progress paying off debt. And I hate to be the bearer of bad news, but it sounds like you may have to put your homebuying plans on hold while your fiance works on his credit scores. Raising a score that much in a short period of time is difficult. For one thing, paying off collection accounts typically does little to boost your credit scores (and that’s certainly true under the scoring models most mortgage lenders use).

    It sounds like he has multiple negative accounts on his credit and not much in the way of recent positive information. The secured card can help (if he keeps the balances super low) but it’s not an overnight thing. It will take time to build up positive payment history and for the negative history to “age” or become older. He certainly should monitor his credit scores and once he gets into the low 600s (using the same FICO models mortgage lenders use) you can talk with a mortgage lender to see what else you need to do to qualify. I hope that helps!

    • http://www.Credit.com/ Gerri Detweiler

      Ricky – Mind sharing your phone number so I can reach out to you that way? Comments are moderated so we won’t publish it.

  • http://www.Credit.com/ Gerri Detweiler

    We published an article on this topic recently: I Have Unpaid Debt on My Credit Report. Can I Still Get a Mortgage?

  • Jay

    Scott/Gerri,

    I’d appreciate a little guidance from you guys, my current situation is as follows. I am looking into buying a home a next year between the price ranges of 350k to 500k. I apllied for a pre approval letter last year and was offered 300k. I have car loan which I owe about 11k (its the highest monthly by over $300.00) and 2 school loans at 3.5k and 15k. I just purchased some furniture with a loan from a bank because it was no interest for 4 years, and that is about 4.5k. I got a credit card last year because I didn’t have any revolving credit and now my score has come from 650 to 715, and I pay the card off monthly. I’d like to see if paying off my loans in full will help me increase this amount. I wasn’t going to pay the furniture off because I was told lenders typically like to see a couple of years of payments prior to paying things off? I make about 14k/mo., but that includes about 8k considered as bonus not salary (not sure if lenders consider the bonus as part of the income), and I would be able to pay these right now and still have funds in the bank. In essence I would be debt free, minus the credit card which I use to pay bills with and pay off every month. Your advice is much appreciated. Thanks.

    • http://www.Credit.com/ Gerri Detweiler

      How is the furniture loan reported on your credit reports? As as revolving account or installment account? If it’s a revolving account then the important factor there is utilization. If the reported balance is high in comparison to the credit limit then paying it down could boost your credit scores. You might try paying it down to 10% of the available credit to see what that does to your scores.

      Paying down installment accounts can help though typically not as much. Again you could pay it down to that level, keep a small balance and see what that does to your scores. Paying it down to 10% of the credit limit/high balance shouldn’t hurt and may help, but I never like to guarantee what will happen with one particular action – there are too many moving parts in credit scores to say for certain!

  • Ashleylou08

    I have a question. So I have been blessed with outside resources to pay for my car and a previous home in full. I have no debt. But I also have no credit. I’ve heard the phrase “no credit can be as bad as bad credit”. So my question is this. I will be purchasing a new home again soon but will be needing a mortgage. Is it better for me to open a credit card at say Best Buy and finance something and pay it off within the first few payments to have some form if credit before meeting with the lender? Or an I better of not opening any credit cards at all and having to out down a larger down payment? My fiancé is the breadwinner at the moment and has decent credit but also has a car payment. But While I don’t have credit I do have a nice chunk if money in my savings. What do you think out best option is?

    • http://www.credit.com/ Credit.com Credit Experts

      You may want to start with a secured card or what a credit union calls a “credit builder” loan. Here’s how a secured card could help: How Secured Cards Help Build Credit. A credit builder loan is one in which you essentially borrow from yourself (you put the amount “borrowed” in savings at a credit union and borrow that amount (at a relatively low interest rate). In both cases, pay on time. And check your credit reports. Here’s how to get your free annual credit reports. Also, monitor your credit scores. If you are a credit “ghost” now, you can find that out, and you should relatively quickly see that you begin to have a score. Here’s how to monitor your credit score for free. One more strategy might be having your fiancé add you as an authorized user on his credit cards. Good luck on your new home.

  • http://www.Credit.com/ Gerri Detweiler

    There are so many moving parts to a credit score – and so many different models – that it’s impossible to say that you should do exactly this or that. Paying off debt is also tricky. The mortgage company won’t look at you negatively because you’ve paid off debt. They just want the score. And in the case of the installment loan, paying it off completely could mean you have fewer open installment accounts which could potentially impact your score, but it depends on everything else in your report.

    I suggest you ask the lender who gave you the preapproval lender what you need to do to get preapproved for a larger amount. They have the full picture – income, assets, credit scores etc and are in the best position to advise you on next steps.

    • ScottSheldonLoans

      This would help your score with the debt pay downs and opening the amount of free credit available. Also paying off the debt would help mean you could take on more mortgage payment and potentially not have any disturbance to your cash flow as you would be replacing bad debt with good debt.

  • CJR

    I would love some advice before I start the home buying process. My fiance and I have about $10k combined credit card debt and 2 car loans at about $20k each. We have credit scores in the 700s but don’t have much money to put towards a down payment. Would you suggest trying to pay off credit first, or start saving more for a down payment? Thank you!

    • ScottSheldonLoans

      This depends solely on what your personal goals and objectives are. Assuming you want to purchase a house immediately the best thing you could do is consolidate your liabilities reducing the minimum monthly payment and take the savings generated by completing the consolidation and use that towards the down payment to purchase a home.

  • Josh F

    Hello,
    I have a question regarding what to do with the money from the sale of my current home. We are building a new home for around 425K, we have car loans and student loan debt that totals approximately 55k. Would it be better to pay off all of our non mortgage debt with the proceeds from the sale of our current home or put all of the money towards the new home? If we put all of the money from the sale of our current home towards the new home, it will equal to roughly 20% of the sales price.
    Thank you,
    Josh

  • michael

    I can get your scores higher, that is simple and easy. I was 575 two months ago and now I am a 752

  • Red

    Hi
    First of all, thank you so much for the article!
    Now I’d like to ask you something.
    I am single, no children but I have a car loan of $560/month for another 5 years.
    I also have in credit/department stores cards debts that total almost $14k distributed in 9 cards
    My mothly income is $2800gross and $2230net
    I’ve been paying rent for over 8 years now.
    I really want to buy a house but my credit score is in the 600s because of the balances of the card being to high compared to the limits (which is true, most of them are 95%used) and many inquiries(idk why)
    Would I still qualify for a mortgage given all the circumstances?how would these debts impact my chances on qualifying and being able to apply for a mortgage?
    Thank you for the answer in advance

    • ScottSheldonLoans

      2800 gross income – total liabilities you can take on would be $1260 per month less 560 car payment less minimum payments on credit cards would be how much total mortgage payment you could take on after other current liabilities are paid first. Answer question whether or not you can qualify it is unknown with out knowing your credit score, your down payment, or how much those credit card obligation payments are.

  • Red

    I also did the ‘how much home you can afford’ and it states that I can afford a home of a little over $5k
    But I didn’t get it

  • Trusteve

    We just paid off all of our cc debt… Would it hurt to see if we got approved for a home mortgage? Or should we wait?

    • http://www.Credit.com/ Gerri Detweiler

      Congrats! (Hopefully you didn’t close out all your accounts after you paid them off.) It can take up to a month or so to see all the balances updated. How about monitoring your scores to see when that happens and then get preapproved? You can free credit score here.

    • ScottSheldonLoans

      Agreed with Geri–paying them off in full was a smart move, but hopefully you did not close those accounts. Assuming that you did pay them off in full and did not close those accounts, you would probably want to wait at least 30 days moving into next month so the credit report shows no liability this way it’s just a mortgage payment against your income with no other debt.

  • http://www.thecemeteryexchange.com MFW

    Is it still the rule that if you have a credit card balance and it can be paid off within 10 months that the mortgage broker does not include as part of your DTI?

    • ScottSheldonLoans

      No if there is a debt it is counted, no matter what.

      • http://www.thecemeteryexchange.com MFW

        Thank you Scott – I better get crackin’!

  • Sawan

    Hi Scott,

    I have two questions:

    Question 1:
    I currently live in a rented apartment right now and trying to finalize a home and get into it at least 2-3 months before the apartment lease finishes. This overlap would basically allow for setup of the new home.

    I want to understand if there is a way to close the loan, but not let the installments start for until 2-3 months. I am basically looking to see how I can avoid dual expenses on a apartment rent and the loan installment.

    When I had got a car loan, they allowed for the loan installment to start 45 days after the loan closure. So just curious how mortgage loan works.

    Question 2:
    Me and wife both have a healthy credit score (mine is around 750, my wife’s is close to 800).
    My wife used to work in 2014 and is now again searching for a job in the state that we moved to.
    Would her credit score help us in getting a better loan, although she does not have a income to show right away?

    • ScottSheldonLoans

      For question one the answer is 60 days, but not longer. This will mean more prepaid interest, more cash to close up front at close of escrow, but, should help your situation nicely with the dual housing expenses. For question two her credit score would not help if she doesn’t have any income to bring to the picture. In fact even if her credit score is higher than yours, any debt she brings to the picture would only worsen the structure of the loan so I will probably advocate keeping her off the loan, based on what you’re sharing here.

  • Vivaan

    Hi Scott,

    I am planning to buy my first house. I make $120K annually. My credit score is over 760. I have fixed monthly payouts on a old personal loans and credit cards of $1600. I would have paid off 2 of these loans in the next 6-8 months bringing the monthly payout down to $1000. Monthly car loan of about $500. Revolving credit card debts of around $1200 every moth which I pay off in full. I don’t have enough savings after my down payment. I was planning on taking a personal loan to consolidate debt into lower monthly payments and also have some extra cash on hand after my saving are gone in down payments. That way I would have brought down my monthly payouts to round $600 and have only one debt to pay for. My question is that though this will give me more cash on hand – but will this affect my home loan approval. I do have a pre approval from a bank which just checked my credit report and asked basic questions. Seek your advise.

    • ScottSheldonLoans

      Hi Vivaan,

      To answer your question I need the minimum monthly payments on all of your obligations you pay each month. Just the minimum monthly payment. Can you post it here for us? Then I can email you back also tell me how much you have to spend on house, total dollar amount?

  • kewi

    Hi Scott, I have a lot of debt and about a 620 credit because if debt to income ratio. I was not financially savy in my youth and if i needed the funds i just got it from whatever lender would lend it. As of current i have 4 personAl loans and 4 credit cards 3 of which are nearly maxed out and 1 store card. Would it be a better option to take out a 5th larger loan to pay everything under one roof and make large payments? Right now i pau about 900 on them separately. ..but will the inquiries searching for the new loan hurry about 6 months down the road when I’m ready to purchase?

    • ScottSheldonLoans

      Yes without the means to pay off the credit cards in full consolidating the accounts into one new account with a low monthly payment will open up your available credit increasing your credit score and hopefully the same time will reduce the minimum payment associated with the total balance improving your debt to income ratio. If your timeline is six months, this would be a good approach to take.

  • YJ

    Hi Scott,
    I purchased a TIC in San Francisco. We have been approved to convert to condo so, will all need to refinance once the conversion is completed. We’ve all just paid the city a fee of $20,000 per unit to do so and, it’s pretty much a go at this point.
    I’ve put in 25% down for the TIC loan. I currently have close to $30k in credit card debt. Should I take out a personal loan to consolidate my cc debt before I have to refi?
    Any other relevant tips for this situation?

  • AH

    I am currently trying to buy a house but my credit is a 638 now that my lender has ran my credit. It was in the 640s. Anyways he is saying my dept to income ratio needs to be lowered and to try and refinance my truck. I’ve tried 2 banks and both have denied me because of delta in collections and not enough credit history. What can I do?

    • http://www.Credit.com/ Gerri Detweiler

      Is there any way for you to get some additional work to pay down debt so you can qualify — even on a temporary basis? If not it may be that you have to wait until you have some time to bring up your scores. I am sorry if this seems vague; it’s very difficult to advise based on limited information.

      • AH

        I’m currently in school at night so I don’t really have time to pick up anymore work. And thank you for your help. I’m open to any ideas on something that could help.

  • Anne B

    Scott, I have a question about lowering my debt to income ratio. My house, ins & tax is currently 573.42. Car payment 260.00 and credit cards 384. This brings my total monthly debt payments to about 1218. My gross monthly income is 3,750, so that should mean my current DTI is about 32%, I have a credit score of 789. I recently decided to sell my current home so I can buy a home closer to work, but when I applied for a mortgage to get preapproved, I got turned down. The credit union said my DTI under the new mortgage would be too high. I applied for a 100K mortgage, at about a 4% interest rate, with ins & tax included in the payments, they would have been in the $700 to $800 range per month. This would have put my new DTI at about 38% and I think that is what the credit union didn’t like. I’m thinking about cashing out an old 401K to pay off the credit card debt. I’m wondering if I can get your opinion on whether it is better to have those 401K funds saved up as an asset to show a potential loan provider or whether it would be better to just use the funds to pay off the debt. The 401K totals about 10K. I have other savings in a new 401K and a savings account, but that only totals about 3K. Would the bank rather see more savings or debt paid off? Just not sure what to do. The down payment for the new home would come from equity after selling the current house. I would appreciate any advice from anyone. Thanks

  • Jennifer Ortiz

    Hi there. My husband and I faced a horrible tragedy in 2008 with a child and due to this suffered several collections. Most are over 5-6 years old and only 2 are over $1000. My credit is sitting at about 618 Experian and 585 on the other two. If we sell our house we stand to make a large profit. We are going to use that profit to pay off our cars and all debt. Plus have a decent deposit on another house. However I will leave small credit card with a small balance to boost credit. So our debt to income ratio will be excellent but I am trying to boost credit. How long do you think it will take and will a lender work with us with the old collections? The credit predictor is estimating a 675 – 685 credit score with the changes. We would like to build so we have some time.

    • http://www.Credit.com/ Gerri Detweiler

      We’re so sorry to hear what you’ve been through. Remember collection accounts may be reported for seven years plus 180 days from the date you first fell behind with the original creditor, regardless of whether they are paid or unpaid. If he fell behind in 2008, then it sounds like it is getting close to the time period where those can no longer be reported. This article goes into more details about collection accounts: The 7 Biggest Questions About Debt Collections & Your Credit

  • hunneysue

    My husband and I are looking at buying a 2nd house in another state. We don’t want to sell our current home but have a renter lined up willing to pay the full mortgage payment we are now. (have a rental agreement drawn up and it helps that it is his mother) We talked to a bank and they told my husband his dti was too high (said 51%) and for the life of me I can not figure out where they are coming up with that figure. I looked at last year’s gross income and only his debts as it would be in his name only since I do not work (my credit score is fine, I do have some minor debts like student loans and a credit card, that are being paid off..actually my student loans will be paid off a year and a half early..by my mom as part of an agreement that she’d pay those if I would stay home to care for her, which I do). front end dti for the numbers I am crunching is 35%, back end (we have a house in mind and know what the loan amt etc would be so going on the bank’s estimated payments with ins and taxes) dti would be 43%. What could they be counting that I am missing? This is frustrating because the dti still counts our current mortgage as part of that debt without taking into account any money gained by it being rented (they wouldn’t accept just a rental agreement without proof of on going rent payments!). His credit score is 775 and we already have 10% of the loan avail in our savings account. Any advice?

    • http://www.Credit.com/ Gerri Detweiler

      It’s hard for us to guess what they are counting that you aren’t. Have you asked them to go over it in detail with you? Also remember rent usually does not count at 100% either, even if the rent is covering your costs it will be counted at 75% is my understanding.

  • Erika

    Hi I’ve been paying off my debts slowly for the past 5-6 years..my score was 727 from experian fico and now that I paid my car off my score dropped to 691! I was shocked that it would drop so much after I have no more debt..do you know how long it will take to go back up? I have zero debt now and I have 20k saved..I want to start looking for a place but my score seems low..

    • http://www.credit.com/ Credit.com Credit Experts

      Erika —
      Paying off accounts often does not help. What DOES help is making sure you are paying on time and that you keep any charge card balances low relative to your credit limits (you definitely want it less than 30%, and less than 10% would be even better). You are wise to be checking your credit scores before you apply for a mortgage. Have you also checked your free annual credit reports? The information used to calculate your scores, so errors there could be hurting your score. We suggest checking those carefully and disputing any information that is wrong. You can also get a free credit report summary from Credit.com that offers some insights into why your score is what it is and how you can improve it.
      But zero debt could actually be a problem. Credit scoring models are looking for a track record that shows you pay agreed and on time, and if there is little in the way of a record, it can be harder to get credit. You can consider a so-called “credit-builder” loan at a credit union, or you could apply for a secured card, and then charge no more than 10% of its limit and pay the balance in full every month. Here are other suggestions:
      How to Build Credit the Smart Way

  • courtney clark

    I have a question if we apply for a credit card and put nothing on it does that affect his credit score? or his debt to income if there is nothing on it?

    • http://www.credit.com/ Credit.com Credit Experts

      Courtney —
      It will help, but just a little. Credit age, or how long you’ve had credit, is a factor in your credit score. However, payment history (a history of on-time payments) counts almost twice as much. So it will help much more to use the card, even for minimal charges, like a trip to Starbucks every month, and pay on time. Another option is to put a small, recurring bill on the card and automate payment. That would have a much bigger effect on credit scores.

    • ScottSheldonLoans

      No debt to income ratio will not be affected with an open credit line with no balance.

  • chasity king

    hi im wanting to buy my first home i have a car with only 940 left to
    pay which will be paid off next month and a credit card of 1740 im bout
    to start paying off which will be done in nov and 2 other loans that
    equal about 1000.00 and i will have that paid off in october which will
    leave me owing on a kays card and an old navy card and minimum bills
    like cell phone aand stuff will that help me to get approved for a house
    loan my husband has a credit card and a loan and student loans and
    thats it what can we do to help us improve our chances of getting a home
    by the first of the year

    • http://www.credit.com/ Credit.com Credit Experts

      Chasity —
      You are wise to start checking on your credit well ahead of considering buying a home. If you are not already doing so, now is a great time to begin to monitor your credit. You and your husband can get a free credit score from Credit.com, updated every 30 days. It comes with a personalized action plan that lets you know precisely what steps you need to improve your scores. Also, you should check your free annual credit reports. Your scores are calculated from information in your credit reports. If something is wrong, you would want to catch and dispute it, so that it would be correct well ahead of the time you apply for a mortgage.

  • Charlie

    I was wondering if It was a way to get some kind of loan too use it to pay off your car loans and use what’s left to buy a home? That way all you have is 1 payment

    • http://www.Credit.com/ Gerri Detweiler

      The problem with that kind of loan would be that you would pay the car off over a very long period of time–longer than the car would last. Or you’d have to pay the mortgage off very quickly!

    • ScottSheldonCaliforniaLender

      Yes, it’s a personal loan. You can get a personal loan to pay off debt with, and whatever is left over that is money you could use to buy house with. Typically, in this type of scenario borrowed in down payment funds are not acceptable. The best scenario would be for you to take that money from the personal loan as long as your debt load will support it with your income, and let it sit in a bank account for 60 days so the money is seasoned and then the money is eligible for you to buy a home with as it becomes savings/reserves money not borrowed funds.

  • Chris Myers

    OK.
    I have been bitten by the “I want a house” bug. I got divorced in 2011, and in the process, it pretty much killed my credit, as I had to pay lawyers and child support instead of bills. I have since been working to get things back on track. I monitor all three of my credit scores, and I have been up and down. Mainly because I have small credit cards with low max’s and due to getting re-married, Christmas, Summer visitations and a move they are currently close to maxed out. I will get them paid off again by November, but I still have a couple of pretty hefty bills left over from before the divorce I haven’t been able to address. One is just over 6k, and the other is 5.5K. As a veteran, I started looking at VA loans. They said I have to get the two big ones either settled or paid off before I can go VA. My Scores are all at 593, 603, and 609. My scores jump and drop 40 something points depending on the balances of my CC’s. I am not a big fan of renting for another 2 years as I work to pay off the other loans..let alone come up with any kind of down payment, especially since my rent is as high as a mortgage payment already. My wife’s scores are higher than mine, and she doesn’t have the same issue with back debt. I am just wondering if there are any other options for us, or are we stuck?

    • ScottSheldonCaliforniaLender

      Chris-your credit scores while they are not stellar, they should be good to get a mortgage. I would encourage you to apply. If you apply and you are denied or you can’t qualify ask the mortgage company specifically what you have to do to qualify.. While the things that you identify above are certainly factors in the overall qualifying scenario, VA and FHA for that matter is incredibly forgiving. You might want to call your credit cards and ask them to increase the credit limits not so you can borrow more, but so you can increase your utilization of credit which if approved would subsequently increase your credit score over time. I hope this information helps and thanks for sharing and posting.

  • Obadiah

    Hello, I have a question that hasn’t been answered at least I didn’t read any that asked this question. I am in a situation where I am looking to start getting into real estate investing. I want to start out with an FHA loan at 3.5%. My yearly income jumped from 61k last year to a whopping 250k this year. Even so, the mortgage broker I’m working with can only take the last two years of tax returns. Here is where it gets tricky. She said we could add the last six months of my profit/loss in the equation so we can look at the previous 30 months. When we did the calculations we were looking at about 4k per month of income on average due to 2013 giving me an income of (after tax deductions) about 13k even though I made closer to 23k. I am an independent contractor so I have a 1099 instead of a W2.

    So now I am stuck with this issue. I have a family member who has a condo that they have paid off that is worth 100k and they said I could put that property in possession of my LLC to help qualify for a higher mortgage. Is this something that is realistic? I haven’t ever dealt with this so I’m not sure if this would help me. My debt right now is 37k in school loans, 293$ per month in car payment (I am pondering paying this off-total of 9k in final payments) as well as 50$ per month of recurring credit card debt.

    So I guess I’m just wondering if that is a good option or if it would be less messy to pay off the car and maybe either pay off half or more of the student debts. I would rather not put my cash into paying off debt because of my plans to buy property, but would rather pay off the student debt in the future as I gain more cash flow. My credit score is 728 as well. The income of 250k is from 2015 and I have about 60k so far from that and 50k in savings right now.

    Any information is welcome.

    • ScottSheldonCaliforniaLender

      Hello,
      Post for us the following information so I can attempt to answer your question:

      Your monthly gross income

      please clarify your W two or self-employed

      your estimated credit score

      your minimum payments you have on all credit obligations

      the total amount of money you have to spend on buying a home

      Answer these questions and I can answer your question about the best use of your dollars. I understand some of these questions might otherwise be identified in this big question, but if you can just get right to the heart of the matter, I can you a clear sense of direction or at least take a stab at it,

  • Amber

    Hi, we have about $10k cc debt. We are trying to sell our home currently. Can we still get a mortgage once we sell and pay off cc then? Or should we get a loan to pay them off now to raise our debt to income ratio? Thanks,amber

    • http://www.Credit.com/ Gerri Detweiler

      I’m sorry but I’m finding your question bit confusing. It’s generally harder to get a new mortgage when you already have a mortgage, then it is when you don’t. The new lender will have to take into account both of your mortgages when trying to determine if you qualify for the new loan. So unless you are in a rush to buy, selling your home, and paying off your credit card and your mortgage is probably the way to go. But I recommend you talk with a trusted lender to make sure that there’s not something I’m missing here.

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