With rates rising so quickly, “debt ratios” are becoming a major issue for many borrowers.
Hence, I am repeating this past blog where I set out various ways to lower debt ratios in order to still qualify in a market with rising rates.
Also, in case anyone is interested, 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 because 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 7/6 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.
#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. We also don’t like paying points in general when we think rates may fall in the future, making a refinance very likely.
#5 – 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.
#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 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).
#8 – 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.
Founder/Broker | JVM Lending
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