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Getting a mortgage can be difficult. Sometimes, to increase the odds of being approved or to qualify for a larger loan, prospective borrowers will pay down debts or eliminate existing loan obligations. Often, the process for doing so is simple, but there’s one type of financing that could trip up your efforts: a car lease. Here’s a breakdown of why — and what you can do to so avoid any snags.
When you apply for a mortgage, a broker is going tally up all of the monthly payments you make on existing obligations, including credit cards, student loans, personal loans, car debts and other mortgages. That number gets measured against your income. This debt-to-income ratio helps determine your monthly mortgage payment. (So does your credit score. You can see where yours currently stands by getting your free credit scores, updated every 14 days, on Credit.com.) Sounds easy and simple enough, right?
Well, the concept is, but if more than 25% of your income is already going towards debts, you may not be able buy as much home as you think. When you have other existing obligations, your ability to borrow can be reduced tremendously. That $300 per month car lease, for example, can be severely hampering your buying power.
Mortgage Tip: Remember, lenders will use only what you’re obligated to pay on existing loans in calculating your debt-to-income ratio. Choosing to pay more on your debts can be a good financial move, but mortgage lenders generally don’t give you any benefit for choosing to do so.
Unlike an auto loan, a car lease can be trickier to workaround if you’re trying to pay off debt to qualify for a mortgage. Let’s say your credit report shows a car lease payment at $300 per month. There is a balance on the credit report of $6,000 due, which is the remainder of the lease. If you had a car loan with these exact terms, you could write a check to pay off the $6,000 obligation. Case closed.
Unfortunately, that option doesn’t apply to a car lease. You can give the car back and pay the $6,000 balance that is due. However, to qualify for a bigger mortgage, the lender will need to verify there is no obligation due for car. If you give the car back, the mortgage company may ask what you’re going to drive instead — especially if there is a commute time from where you work to where you plan on residing.
Should you find yourself in this predicament, here are some options to consider.
Paying off debt to qualify for a mortgage usually needs to be documented in the following ways.
All of these steps may seem unnecessary and overly repetitive, but they are a byproduct of the current mortgage lending world. Remember, stringent underwriting requirements help to ensure lenders are making good loans and, more importantly, that you can actually afford the house you are looking to buy.
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