Getting a mortgage is probably largest transaction of your life, no doubt, it will have an impact on your finances for the next 30 years. If you carry consumer liabilities, these unequivocally reduce ability to borrow money. If someone else pays your debt, determining financial responsibly for that party becomes critical.
Consumer Obligations
What we are referencing is any debt tied to or related to any of the following:
- credit cards
- any kind of vehicle or recreational loan, including lease payments
- IRS debts
- alimony
- child support
- student loans
- other housing obligations including insurance, homeowner’s association and property taxes
- even mortgage loans
Also included in the mix is cosigned obligations.*If they don’t report on a credit report same lending rules apply.*
Cosigned debts report on your credit report if you co-signed for credit for another party.If your credit report reports debt you have an obligation for, even if another party pays it, it will be counted against you.
That is unless you can demonstrate…
- History of another party paying the debt
- Why the other party pays the debt
- Can prove the other party has a financial responsibility to pay debt?
Mortgage Tip: Proving another party pays the debt is not a simple a willful act, but the other party needs to be materially responsible for the debt as much as you are, put simply, they would need to have co-signed on your credit obligation for the debt to be omitted from your borrowing ability.
Take the following scenario as example: Let’s you are trying to buy a home, you carry a $500 per month student loan payment that is your obligation, yours alone. To help out with cash flow, mom and make the payment for you, it can even be documented they make the payment. The $500 per month payment would limit your borrowing power to tune of $100,00 a big deal indeed in competitive real estate market.
How To Document The Debt Trail For A Mortgage
A mortgage company will condition for specific supporting documentation identifying the fact another party has made the payment directly to the creditor for the last 12 months or shorter if the inception of the debt is less than 12 months old. This can be supported with bank statements for the last year showing the payment made to the creditor or cancelled checks made to the creditor or credit card statements showing the payment trail, all work.
What Will Not Work:
If the other party makes the payment in cash to the creditor, there is no way to document they make the payment, thus your debt (even though someone else pays it) will be counted in your payment to income ratio.
If the other party makes the payment from a joint bank account you are also on, same situation, it cannot be supported that someone else is paying the obligation.
A word to the wise here-don’t pay in cash because paper trailing holds water when applying for a mortgage. Keep your bank account at arm’s length away, put another way, stay off the bank account of the person paying your debt, it muddies the water.
The offset is to payoff the obligations in full increasing your borrowing power, perhaps with your own funds if it doesn’t hurt your cash close or savings requirements with your lender or loan program you are applying for.
Gift funds is also another route to pay off the debt. Allowed on nearly every loan option, if it can be documented with a bank bank statement and a letter, you should be be in the clear.
If you can’t support for the lending requirement for another party paying your debt and you do not have the cash to pay off the debt. It is time to reevaluate with your lender how much mortgage amount you are eligible for with the obligation counted into your qualifying figures or if refinancing, increase the loan amount to cover the obligation subsequently reducing the payment to income ratio. The payment to income ratio is the amount of monthly obligations both in terms of mortgage payment and consumer obligations as a percentage of your monthly income. Generally, lenders want this number to be no more than 45%, in other words, no more than 45% of your monthly income goes to housing and consumer obligations. This is a key measure all mortgage lenders use to determine and support a continual ability to a make mortgage payment.
If you have been turned down by mortgage company, do not take that result as face value. Get second, third or even fourth opinion. For all you know, the loan officer whom you were communicating with may not fully understand the lending requirements to meet Fannie Mae & Freddie Mac standards associated with omitting debts. They may just assume tell a potential borrower “no” rather than do the extra-leg work that may deal the seal. A sharp loan officer will give you guidance as to what your options are in determining your loan eligibility, loan program, and any wiggle room you may have in your finances to successfully close escrow.
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