I blogged recently about 8 Ways to Lower Debt Ratios When Rates Are Climbing – and I got numerous additional suggestions from a friend who owns a mortgage bank (Apex Mortgage) back east.
Some of the ideas were so good that I felt compelled to update my blog to “17 Ways.”
Several of the ideas are actually ways to garner additional funds but because those funds can help lower debt ratios in a variety of ways, they still work well with this blog.
And again, because rates have been rising so quickly, borrowers need all the help they can get right now when it comes to qualifying.
As a reminder, I explain what debt ratios are in this blog.
17 Ways to Lower Debt Ratios and/or Garner More Funds
- Put less money down, and use down payment funds to pay off consumer debt. Mortgage debt has lower payments than consumer debt because 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 7/6 Adjustable Rate Mortgage instead of a 30-year fixed-rate loan. 7/6 ARMs (fixed for 7 years before rolling over to 6 month ARM) 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. We also don’t like paying points in general when we think rates may fall in the future, making a refinance very likely.
- Pay down consumer installment debt (like an auto loan) to 10 months remaining. Lenders allow us to omit installment debt when calculating debt ratios if there are 10 or fewer payments left on an account. Fannie Mae and Freddie Mac (conforming financing) will allow borrowers to pay down these debts to 10 payments or less in order to exclude the payment. FHA financing, however, requires that 10 payments or less be naturally remaining.
- 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 conforming financing and 115% for FHA financing for qualifying purposes, e.g. if a borrower gets $1,000 per month in social security income, Fannie Mae will consider it $1,250 per month in most cases (1.25 x $1,000).
- Switch to FHA or Non-QM. This does not “lower” debt ratios per se, but it does provide for more flexibility. This is because FHA financing is far more flexible than Fannie Mae and Freddie Mac (conforming) financing when it comes to debt ratios. Non-QM loans offer another alternative, where rents or bank statements can be used for income, but these loans come with much higher rates.
- Switch to Jumbo Financing. Jumbo rates are as much as 1% lower than conforming rates. To switch to jumbo, borrowers need to either borrow more than the conforming limit or see if their jumbo lender will accept some conforming loan amounts. Jumbo loans are more difficult to qualify for, so this option is not always viable.
- Use Financed Single Payment PMI. Private Mortgage Insurance (PMI) payments for a $500,000 loan at 90% loan-to-value can add $200 or more to a monthly housing payment. That payment can be eliminated though by paying for PMI upfront with a single payment (at a cost of about 1.5% of the loan amount, depending on credit score). Lenders can help pay for that with a lender credit or by financing the payment with a larger loan.
- Refi Car Loans. It is often possible to refi car loans to obtain a lower payment – by lowering the rate, extending the term or simply re-amortizing the remaining principal.
- Margin/Securities Backed Loans. Borrowers can sometimes borrow against their securities and NOT have those loan payments count against debt ratios. Those funds can then be used to pay off consumer debt or to make larger down payments.
- Refi Student Loans – Into Spouse’s Name or Into Lower Payments. Refinancing into a spouse’s name is an option if the spouse taking on the loans is not going to be on the mortgage.
- Liquidate retirement funds. There are options for first-time homebuyers that allow them to avoid penalties, but some borrowers do this anyway even if they can’t avoid the penalties.
- Borrow against retirement funds. These loan payments also often do not have to be counted against debt ratios.
- Ask A Relative to Get A HELOC. If willing relatives don’t have “gift funds” at the ready, borrowers might ask them to obtain a Home Equity Line of Credit and use it for gift funds.
- Temporary Retirement Liquidation. Borrowers with a house to sell might consider liquidating retirement funds – with the intention of paying back those funds within 60 days to avoid penalties. This of course is risky because those borrowers will have to be sure to sell their home in time to pay back those funds before the 60 day period runs.
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