Brokers looking to help their most debt-ridden clients can use the following tips to improve their chances of landing a loan.
Installment loans as liabilities
Lenders always assess each and every borrower they attend to, looking at their credit scores, their collateral for the loan, their ability to pay back the loans, and the amount of expenses they have against their monthly incomes—also called the debt-to-income ratio.
Of the factors lenders look for when assessing a borrower, it is the borrower’s debt-to-income ratio that takes special attention. If a borrower’s entire income is being used to pay off debts—whether he or she has a mortgage payment or not—then his or her chances of getting approved for a loan become much slimmer. It does not take much for installment loans such as car loans, personal loans, or even other mortgage loans to become an individual’s largest monthly expense, and they can reduce a borrower’s chances of qualifying for a mortgage.
Getting a loan excluded from your calculated debt-to-income ratio
Did you know that if an installment loan has less than 10 months of payments due, it can be excluded by the lender when determining debt-to-income ratio? The exclusion is on a case-by-case basis, based on the borrower’s financial strength. If the installment loan in question does not take up a good portion of the borrower’s income (say, less than a quarter of his or her income) before the pending mortgage payment is calculated, and there are less than 10 months of payments left, then its chances of being excluded increases.
Considering compensating factors
Lenders will also look at the amount of income a borrower has in reserve after paying off other loans. For instance, if a borrower has an entire year’s worth of income as savings, this “compensating factor” might raise his or her chances of getting approved for a mortgage—even if he or she has an installment loan of less than 10 months with payments higher than that of the mortgage he or she is applying for.
While it is not completely impossible to purchase a home while in debt, most lenders are not too keen to approve loans for borrowers they have no confidence in. To turn the tables to the borrower’s advantage, loan officers should carefully consider how their clients’ outstanding debts are affecting their standing with their lender, and how some of their debts can be excluded during the mortgage approval process.