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.