Improve your income to debt ratio and consolidate your debts

How can I improve my income-to-debt ratio?

Unless you have a lot of cash on hand, you are going to need time to improve your ratios. Paying down credit cards instead of paying minimum payments, or making additional payments on your car or financed furniture and appliances is what may be needed. If you know that you are getting a salary increase shortly, time your loan application accordingly.

It is also important to know which debts to pay. Most underwriting, especially automated underwriting, will not consider debts that have less than ten months left to payoff. However, the normal tendency for people looking to pay off debts is to pay off those that have only a few months left on them. You would benefit more by making a double payment on a debt with eleven months to go - bringing it down to nine months - than paying a debt off completely with just a few months left.

Finally, sometimes there is another way to exceed the ratios. If you are refinancing your home and have a lot of equity (the difference between what you owe on your mortgage and the value of your property), a lender may give you a conditional approval. The approval may be conditioned on you paying down or paying off some existing debt. You may be able to borrow a little more money on your mortgage loan from your equity and pay down your debts to meet the condition.

Should I consolidate my debts?

Be careful of conditional acceptances. Some lenders are just trying to get you to borrow more money from them. If your debt ratios are good and you are current on your bills, you should question why this is necessary. Some lenders will also try to get you to borrow more money to consolidate your bills. This may have nothing to do with credit or income-to-debt ratios.

You will be given monthly payment numbers showing that you can lower your interest rates and monthly payments by borrowing additional money on your mortgage to pay off your car, credit cards, student loans, etc. It is true that you will save money initially. However, many people find that within a short time, they have the same debt they had before they consolidated, in addition to a bigger monthly mortgage payment. Unless you are extremely disciplined or extremely desperate, stay away from consolidation loans.

The added benefit of paying down debt is that your credit score will also improve.

How does the property itself figure into the mortgage formula?

The final consideration in seeking a loan is the real estate involved. The standards have changed in the last few years because of low interest rates, the rising cost of real estate, and the availability of money to lend. However, there are still two things to consider - the loan-to-value ratio and the down payment.

How will an appraisal affect my down payment?

The appraisal can have a significant impact on the amount of the down payment you will have to pay. In a seller's market, when buyers are many and sellers are few, property may be overpriced. You are free, of course, to pay any amount you wish for the property you buy. The problem arises with the loan you can get. For example, if the property you want to buy is appraised at $5,000 less than the price you have agreed to pay, your lender will want you to come up with a down payment that is $5,000 more than would be required if the property had appraised at the sale price.

Traditionally, a conventional (not government-insured or guaranteed) loan required a minimum 20% down payment. Government-insured or guaranteed loans required between 0% and 10% down, depending on the type of loan. Unfortunately, because of the changing standards involving real estate, fewer people have the 20% required down payment. However, there are ways to pay a smaller down payment.

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