When you qualify for a mortgage loan, it may not be for the amount you want. Outstanding debts can affect how much you are able to borrow. But in some instances, you may be able to pay off the debt in order to qualify for a larger loan.
If you reduce the number of installment payments to 10 or fewer, the loan may not be included in your debt-to-income ratios. However, if the debt requires a large monthly payment, an underwriter may consider it a risk in your debt-to-income ratio.
For example, a borrower who has a $900 monthly payment on a car loan can reduce the debt down to 10 remaining payments. But the underwriter can require the debt be paid off completely so the remaining balance won’t count against the borrower. Underwriters carefully evaluate the balance between debts and mortgage loan size to determine a borrower’s eligibility. In this case, the underwriter thought that the $900 monthly car payment in addition to a monthly mortgage payment could pose a financial risk for the borrower.
It’s important to stay updated on current mortgage guidelines to know how they affect you. In the past, a borrower was required to close a revolving credit card account, even if the debt was paid off.