How To Lower Debt Ratios 101
Experienced Mortgage Analysts (or Loan Officers) have many tools to lower debt ratios to help borrowers qualify for a larger loan. Here are a few that all loan officers should know:
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 7/1 Adjustable Rate Mortgage instead of a 30 year fixed rate loan. 7/1 ARMs have much lower rates than 30 year loans, allowing borrowers to qualify for more.
4. Buy down the interest rate by paying points. This is as not as effective as many people think. Buying the rate down 1/4% on a $400,000 may only reduce a payment by $60 per month.
5. Pay down consumer installment debt (car payments) 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 simply a reminder, but all seasoned loan officers should know to do this from the get-go.
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