Be wary about paying off this type of debt when getting a home mortgage

Most mortgage companies will let you pay off debt to qualify for a mortgage. The beauty of doing so is borrowing power increase. Here’s what you know when paying off debt to getting a bigger mortgage amount….

Paying off debt to qualify is a wonderful way to drive borrowing power. For example, let’s say you have a couple of credit card payments totaling $300 a month with some relatively small balances. Upon the advice of an experienced mortgage lender, you allocate some of your down payment funds towards paying off those credit cards lowering your payments $300 per month. $300 per month equates $50,000 of spending power so the upside in a real estate transaction can be significant.

That said, the debt that you want to make sure to be very cautious of is an auto lease. Unlike a traditional installment loan or auto loan for example wherein there is a set monthly payment and balance, a lease works differently.

*Mortgage tip: an auto loan can be omitted in your payment to income ratio where the debt has less than 12 months of payments due to paid in full.

An auto lease has a set monthly payment associated with it which counts negatively in your debt to income ratio and then it reports the rest of the balance of term of the lease only, not the total cost of the vehicle. When you lease a car it’s not just the lease obligation that you are financially on the hook for it’s the whole entire total cost of the car difference.

For example, let’s say that you have $5,000 left on your car lease and your car lease is $500 a month. You can invest $5,000 and get rid of $500 a month of payment increasing your borrowing power to the tune of $100,000, right? Not so fast and here’s why…

The way the leases are structured you have a set term of the lease, when that lease term is up and the balance of the term of the lease due you have two choices surrender the car removing the obligation completely or pay off in cash the rest of the balance of the car. When dealing with a car lease it’s not as simple as just paying off the rest of the debt and not having a monthly payment.

Residential mortgage lenders will not let you have a debt that’s sitting out there open-ended with no payments due on it. The debt must be accounted for either by the obligation being debt serviced monthly meaning you’re making agreed-upon payments or the debt is paid off in satisfied in full. This can be very dicey if you have a car lease on your credit report as this car lease can adversely affect you in two ways got. It can adversely affect your debt to income ratio and it can adversely affect your cash to close. When if and or at all possible if you’re considering a car loan and you’re ever going to be buying a house in the next couple of years buy the home first then finance a car.

Looking for a quality mortgage lender? Get a no cost quote now.

RELATED MORTGAGE ADVICE FROM SCOTT SHELDON

When buying a home, it’s natural to want the lowest mortgage rate possible. But sometimes, chasing a slightly better rate from another lender—especially after your offer has already been accepted—can backfire in a big way. Let’s walk through a real-world scenario. You’ve got an offer accepted on a house. You’re working with a lender who has you approved, documents in underwriting, and a 21-day close of escrow in place. Everything is moving forward. Then you hear from another lender offering a rate that’s 0.25% lower, with slightly better closing costs. It’s tempting. But before you make a jump, here’s what you need to consider. Switching Lenders Comes with Time Costs When you pivot to a new lender mid-contract, they’ll need to: Re-underwrite your entire loan, Order a new appraisal, Disclose and sign new loan documents, Submit the file for final loan approval, Schedule and fund closing—all over again. This doesn’t happen overnight. Even in ideal circumstances, the new lender is likely going to need at least 25–30 days to close. If you’re in a fast-moving or competitive market, this is a real problem. Most sellers won’t grant a contract extension just because you’re switching lenders. So, what happens next? A Contract Extension Can Jeopardize Your Deal Asking for a contract extension means the seller must agree to delay closing. But that delay introduces risk—especially if the seller has backup offers or simply wants certainty. They may not grant the extension. Or worse, they could cancel the deal outright and take another buyer’s offer. Even if the seller agrees to extend, your earnest money and negotiation power could take a hit. And for what? A slightly lower rate that might save you $50 to $75 a month? Mortgage Rates Aren’t as Far Apart as You Think Here’s the truth: all mortgage lenders get their money from the same place—the bond market. The pricing differences between lenders usually range from 0.125% to 0.25% in rate on any given day. If one lender seems to be offering dramatically better pricing, the first thing you should ask is: How? Head over to FreddieMac.com and check the average 30-year fixed rate posted weekly. This is one of the most reliable benchmarks for where rates truly stand in the market. If a lender is quoting you a rate that’s well below that average, ask for the details: Are they charging extra points? Is this a teaser rate with a prepayment penalty? Is it based on a different loan product or risky structure? Often, what sounds “too good to be true”… is. Consider the Bigger Picture Think long-term. If you’re financing $600,000, a 0.25% lower rate may reduce your payment by roughly $75/month. But what if you lose the house and have to start over? That monthly savings doesn’t mean much if you’re outbid on your dream home or lose your deposit. Also, remember: you’re not going to keep this rate forever. Today’s homebuyers typically refinance when rates drop by about 0.75% or more. So if rates fall within the next year or two, you’ll likely be refinancing anyway. Instead of paying extra points now or risking the entire deal for a minor monthly savings, it may be better to accept a slightly higher rate—knowing you’ll refinance when the time is right. The Real Risk Isn’t the Rate—It’s the Delay When shopping for a home loan, don’t just ask, “What’s your rate?” Ask: Can you close on time? Is this rate sustainable or based on hidden costs? Will switching lenders delay or jeopardize my contract? A home purchase contract is a binding agreement between you and the seller to perform within a set timeframe. If you can’t meet those dates because you're chasing a slightly better rate elsewhere, you may want to reconsider if now is the right time to buy. Final Thoughts Yes, interest rates matter. But execution matters more. Before making a switch mid-transaction, talk to your lender. Have an honest conversation about pricing, timelines, and strategy. You might find that staying the course, securing the house, and planning to refinance later offers a better path to financial security. Want to Know Your Options? Let’s compare rates and strategies the smart way—without risking your dream home. 👉 Click here to get a custom rate quote today.

The Risks of Chasing a Lower Mortgage Rate

Why Chasing a Lower Mortgage Rate Can Backfire When buying a home, it’s natural to…

A woman sitting at a kitchen table looking through documents with an American flag and framed military photo beside her, symbolizing a surviving spouse exploring VA loan options.

VA Loan Options for Surviving Spouses

Understanding VA Loan Refinance Options for Surviving Spouses Losing a spouse is one of life’s…

Smiling man holding a "Mortgage Approved" sign in front of a modern home and a DSCR loan presentation board showing rental income exceeding mortgage payments.

How to Buy a Home Without a Job Using a Rental Property Loan Strategy

If you’ve got solid credit and a decent amount of cash on hand—but no W2…

A scenic suburban neighborhood in Sonoma County, California, with diverse homes surrounded by lush greenery and rolling hills. Overlaid bold white text reads, “Buying a Home in Sonoma County in 2025: Income, Prices & Market Truths.”

Navigating Sonoma County’s Housing Market in 2025: What Buyers Need to Know

Sonoma County Home Buying in 2025: Navigating Economic Uncertainty and Affordability As a mortgage loan…

View More from The Mortgage Files:

begin your mortgage journey with sonoma county mortgages

Let us make your mortgage experience easy. Trust our expertise to get you your best mortgage rate. Click below to start turning your home dreams into reality today!