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Worried about your credit load affecting mortgage approval? If you need to pay down debt, here's what you should know.
There are two classifications of monthly payments lenders pay attention to. The first compares the total monthly mortgage payment with gross monthly income. The second looks at the first combined with all other monthly credit obligations such as a car or credit cards. Most loan programs like to see the front 'ratio' be around 33 percent, expressed as 33. The back ratio likes to be around 43. Both numbers can be a bit flexible, so make sure you don't prequalify yourself on your own. Too many times, potential borrowers run their own numbers and mistakenly assume they can't qualify.
To pay down debt, start by reducing credit balances. Lenders like to see some credit usage, so aim for about one-third of your credit limit. You can pay it off in a lump sum or with extra monthly payments.
Another tip is to pay down installment debt to under 10 months remaining. Most loans don't count debt with less than 10 months left. For example, a car loan with under 10 months won't be considered. However, if you have a leased car with less than 10 months left, expect extra paperwork, as lenders know you'll either return it or finance a new car.
If the lender asks you to lower your debt during the application process, you can pay it down, as long as they approve it. Be ready to show you have enough verified assets to pay off debt while keeping cash reserves. Typically, six months of monthly payments are required as reserves, ensuring you have funds left after closing.
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