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8 Ways To Lower Debt Ratios & Qualify for More

8 Ways To Lower Debt Ratios & Qualify for More

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:

  1. 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.
  2. Find a non-occupant or occupant co-signer or co-borrower. Both FHA and Conventional lenders allow for non-occupant co-borrowers.
  3. 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.
  4. 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.
  5. 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.
  6. Garner gift funds to either increase a down payment or to pay off debts, as discussed above.
  7. 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.
  8. 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.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646