Can I pay off debts to qualify for a mortgage?
This question comes up a lot, and like many other questions 
regarding mortgage financing it has a very simple answer - yes, no, and maybe.
Fact is, you can pay off some debts to help qualify for a mortgage loan, but some debts will not be allowed to be paid off to qualify. This is one area where the term "creative financing" comes into play, and another reason it's so important to work with an experienced & knowledgeable professional when obtaining financing for a home purchase.
Installment Debt
Installment loans are loans that have a set term and payment schedule. Things like auto loans, student loans, and personal loans are all considered installment debt. These debts CAN be paid off prior to a loan closing if necessary to either qualify for a loan, or qualify for a higher loan amount. Once paid off, an underwriter will not hold the debt against a borrower.
!!Important to remember!!
-Auto leases are NOT viewed the same way as auto loans. Paying off an auto lease will not help a loan application or reduce debt/income ratios because an underwriter assumes that once a lease is paid off, another auto debt will have to be taken on.
- Installment loans that are cosigned can sometimes be excluded from a debt-income ratio with adequate proof that someone else has been making timely payments for an extended period of time. In this case, these accounts don't necessarily have to be paid off in order to exclude them from your debt load.
Revolving Debt
Things like credit cards or lines of credit are considered revolving debts. These debts cannot be excluded from debt-income ratios simply by paying them off. The logic behind this is that these accounts may be paid off, but can be run up again immediately following a loan closing. Whether this makes sense is debatable, but regardless, that's the way it is, at least with conventional lending.
HOWEVER, if revolving debt accounts are paid down AND closed, they can be excluded from debt-income ratios for the purposes of qualifying. For home equity lines of credit, lenders can use a reduced payment on a paid down balance IF there's evidence that the max credit line amount is also reduced to the new balance.
UPDATE!!! As of 5/26/15, Revolving debts CAN be paid off to qualify for a new loan WITHOUT accounts being closed. Sometimes, when rules change, they do get it right!
!!Important to remember!!
-Closing accounts can affect credit scores. Closing an account to improve debt-income ratios can actually hurt your chances of getting a loan if it reduces your credit scores. Another reason why you need to work with someone that knows what they're doing.
- Underwriting is subjective. An underwriter will take credit history and management into account on making a final decision on including or excluding debts, even those paid in order to qualify.
- Some of our portfolio lenders DO allow revolving debt to be paid down or off to qualify. It's a case by case basis.
When thinking about paying off debts to help qualify for a mortgage loan, the best thing you can do is talk to an experienced loan officer to determine which debts, if any, are safe to pay off and can be excluded from debt-income ratios. You can pay off debts to help qualify, but it's not an exact science so you need an expert in your corner to help make the right decisions.
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