Certain debts on a credit report can be excluded when a lender calculates a borrower’s debt-to-income ratio. Removing approved debts from the debt-to-income ratio can make it easier for a borrower to qualify for a mortgage. Here are some examples:
Co-Signed Loan Obligations
If a mortgage applicant has co-signed for a car or mortgage on behalf of someone else, and the primary borrower has made full payments for at least 12 months, the mortgage lender can exclude this debt. The applicant will have to provide bank statements or canceled checks showing consistent payments being made.
Business-Paid Auto Loans
For self-employed buyers, an auto loan paid directly from a business account can be removed from the buyer’s mortgage calculation. Business bank statements must show ongoing payments from the business account, and the expense must be claimed on the borrower’s tax return.
Authorized User for Credit Cards
When a borrower is listed as a secondary user on a credit card and the primary cardholder is fully responsible for the balance, the mortgage lender can exclude that account. Documentation may be required to show that the primary cardholder has been making the payments.
Charge Cards
Some credit card providers, such as American Express, offer charge cards that require the balance to be paid in full each month by the borrower and do not have a minimum payment. Since there is no required monthly payment amount, a mortgage lender can exclude this credit obligation once it is confirmed that the balance is paid in full for the billing cycle. You may need to show sufficient assets to cover the balance of the card.
Self-Reported Utilities
Any self-reported utilities a borrower is claiming in an attempt to bolster their credit will be omitted from qualifying ratios. Check out our blog on what is and isn’t included in your debt-to-income ratio. Spoiler alert: utilities are not included.
General Installment Debt
Most installment debt will be automatically excluded once fewer than 10 payments are remaining on the loan term. You also have the option to pay off the debt or even pay it down so that fewer than 10 payments are due.
Excluding eligible debts makes it easier to qualify the homebuyer, giving the mortgage lender more flexibility when determining loan approval and amount. If you have further questions, please contact our office at (760) 930-0569 to speak with one of our Mortgage Loan Originators.
