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Understanding Debt and Mortgages

Mortgage and Lending with First Option Mortgage 269761


According to Nerdwallet.com, in 2015 the average American household owed over $15,000 in credit card debt, over $25,000 in auto loan debt and over $45,000 in student loan debt. That’s just 3 items! At the bottom of this blog, I’ll give some ideas of how to pay off your debt and how to make some extra money to pay off debt! Here is some information regarding debt and mortgages.

  •         For every $50 spent on monthly debt = about $10,000 of purchase money. Think about that the next time you decide to buy a car first
  •         Credit card interest is not tax deductible. Mortgage interest is tax deductible (for most people)
  •         An entire mortgage payment consists of PITIMIDF: Principle/Interest/Taxes/Home Owner’s Insurance/Mortgage Insurance (if applicable)/Home Owner’s Association Dues (if applicable)/Flood Insurance (if applicable)
  •         Lenders use 2 ratios to qualify a person; Front End ratio is the income versus PITIMIDF. The Back End ratio is the income versus PITIMIDF and the monthly debt expenses (mostly found on the credit report)
  •         Rent, utilities, cell phone bill, car insurance, day care, groceries are not counted against income. This is not considered qualifying debt. HOWEVER, if you write these as expenses on your tax return, it may affect your qualifying income. VA loans do count some items against income
  •         Ratios look like this: 29/41 where 29 is the front end ratio and 41 is the back end ratio. This means that you can use 29% of your income to pay for the house and 41% of your income to pay for your house plus your debts. Example: Income = $4000 monthly. $4000 X 29% (.29) = $1160 is the maximum income that can be used to pay for the PITIMIDF. $4000 X 41% (.41) = $1640 is the maximum income that can be used to pay for PITIMIDF and the monthly qualifying debt
  •         Each mortgage entity (FHA, Fannie Mae, Freddie Mac, VA, USDA, Other, Hard Money, Private Money, Commercial, Reverse etc.) has its own ratio guidelines
  •         Within each entity, factors such as the following affect the ratio guideline: type of program used, credit score, down payment, type of property, type of loan product, type of income reported, type of income source used, among others depending on the lender
  •         If mortgage insurance (MI) is used, the ratio may also be affected based on the MI company’s tolerance (since they underwrite the loan). Example: The lender may have a ratio tolerance of 33/46 but the MI company may only have a tolerance of 31/45
  •         Additionally, each lender has its own tolerance layer of ratios. Example: FHA allows 39/45 maximum ratios but the lender only allows 33/43 maximum ratios
  •         Debt can be found in other places like the bank statement (personal loans), pay stubs (401k loans/garnishments), or court ordered documents (child support/alimony)
  •         Other debts may not exist yet but a payment arrangement has been created (IRS tax liens). You have to make sure that you tell the Loan Officer about it. We’ll find it and it’s not good for it to be found days before closing
  •         Some Credit cards are reported as “Other” on the credit report and reports the balance as the monthly payment. For example, if you have a $5000 balance, it reports to the bureau that your monthly payment is $5000
  •         Lenders pull credit the day of application and the day before closing to see if you borrowed your down payment. Credit may also be pulled every 60 days while looking for a home or obtaining a loan
  •         The credit pull will show an inquiry and notify the underwriter that you may have created a new debt that may be used against your income
  •         Before underwriting a loan, a buyer must sign a statement that he/she did not obtain a loan from the inquiring companies on the credit report, prior to obtaining the mortgage
  •         You are not allowed to borrow money to pay for your down payment (in most cases)
  •         You may be able to borrow equity from your current home to pay for the down payment on the new property
  •         Large deposits on the bank statement must be explained to rule out that a loan was obtained
  •         Student loan debt, even if deferred, counts against income (as of 11/2015) exception: VA loans
  •         Installment loans (car, student loan, personal loan) with less than 10 payments left may still count against income if the payment exceeds a certain amount of the monthly income (usually 5%) Example: Income $2000 X .05 = $100. Car payment ($500) will count against income
  •         Never pay off debt to qualify for a loan unless you talk to the loan officer first, especially if your credit score cannot take the hit. For example, paying off Installment loans can negatively affect the credit score
  •         DO NOT consolidate loans prior to buying a home. Several small payment loans may be less expensive than 1 big loan. Paying off and closing current accounts, hurts the score
  •         If you are receiving a “Gift” from a relative for down payment, don’t tell me that your relative lent you the money
  •         If you co-sign a debt and cannot prove that the other person is making the payments, the debt will count against you
  •         If you co-signed a debt and your relative said they would make the payment and didn’t, it is still your responsibility
  •         If the judge ordered your ex to pay for a debt and he/she didn’t, it is still your responsibility
  •         If you co-sign a loan with someone and you share a bank account with that person AND you cannot show proof that the other person is making the payment, then the debt is yours
  •         IRS tax liens and judgments must be paid either in full or in monthly installments. The monthly installments will count against your income
  •         Consumer Credit Counseling (CCCS)  and Bankruptcy monthly payments count against income
  •         Part Time income will not qualify to offset the debt unless it is in place for a minimum of 2 years


There are several ways to pay off debt.

  1.       ...     Get another job or 2 or 3 (Ugh!)
  2.       .      You can attack debt using the Snowball Effect
  3.       .      You can buy a house in need of repair at a cheap price, obtain a 203k rehab loan, fix it up and then after 1 year, pull the equity out to pay off the debt.
  4.       .     You may also consider buying a multi-unit home to qualify for a loan. FHA will give you income credit on the other units to help you qualify on the loan (even if they are not rented out at the time of closing). Example: I buy a 4-unit property. I will live in 1 unit. I rent out the 3 units. The average rent in the area is $400 a month. FHA will give me $1200 in monthly income (3 units X $400 each) to help me qualify for the loan. This can be used to offset any DTI issues. If I don’t have a lease at the time of closing, it doesn’t matter. I still get the credit. If I decide not to rent out the properties in the future, it doesn’t matter as long as I pay the mortgage each month. Let’s say that I rent out the 2 units for $600 a month each. It doesn’t matter. If I rent it out 1 for $500, great! Use the extra money to pay off the debt. After 1 year, decide if you want to rent out the last unit and move into something else. You can only have 1 FHA loan at a time in this scenario. You can always refinance it to conventional in the future and then obtain another FHA loan (but that’s another blog).