I repeat this topic from time to time b/c “Debt Ratios” weigh so heavily in our pre-approval process and b/c tight debt ratios so often prevent borrowers from buying the property they want.
I explain what debt ratios are and how we calculate them in this past blog.
8 Ways to Lower Debt Ratios:
- Put less money down, and use down payment funds to pay off consumer debt. Mortgage debt has lower payments than consumer debt b/c mortgage debt is spread out over 30 years.
- Find a non-occupant or occupant co-signer or co-borrower. Both FHA and Conventional lenders allow for non-occupant co-borrowers.
- Get a 7/1 Adjustable Rate Mortgage instead of a 30 year fixed rate loan. 7/1 ARMs usually have lower rates than 30-year loans, allowing borrowers to qualify for more.
- Buy down the interest rate by paying points. This, however, is as not as effective as many people think. Buying the rate down 1/4% on a $400,000 loan, for example, may only reduce a payment by $60 per month.
- Pay down consumer installment debt (like an auto loan) to 10 months remaining. Most lenders will not include installment payments in debt ratios if 10 or fewer payments remain.
- Garner gift funds to either increase a down payment or to pay off debts, as discussed above.
- Gross up non-taxable income like Social Security income and Child Support. This is something all seasoned loan officers should know but most borrowers do not; we can “gross up” non-taxable income by 125% for qualifying purposes.
- Unison Appreciation Share. Unison will contribute funds equal to 10% of the purchase price and require no payments in return (which is why it helps with debt ratios). Unison only requires the repayment of its initial investment plus a small portion of the property’s appreciation. I explained Unison in more detail in this previous blog.
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