If you have big dreams of buying a house, you’re probably wondering what steps are needed to get a home loan. Beyond qualifying, a leading factor that will affect how much your home will cost you overall is the loan terms you end up with.
For example, an interest rate difference of only 2% will cost you an extra $110,000 in interest payments over the life of a 30-year mortgage on a $250,000 home. This interest increase translates to higher monthly payments of more than $300.
Higher interest rates can raise payments to levels exceeding home loan debt to income ratio qualifications, which could prevent you from buying the home you really want.
It’s crucial to understand your debt to income ratio doesn’t only factor in your monthly home payment—it includes the total payments for all debts, such as credit cards, student loans, auto loans, and any other bills that show up on your credit report.
Because debt to income ratios are critical to qualifying for a home loan, many prospective home buyers will do whatever it takes to cut their monthly bills to the bare minimum. If you have significant amounts of unsecured debt like credit cards, personal loans, or collections accounts, you may have considered debt settlement as a way to drop your debt to income ratio quickly.
While debt settlement may be a viable option to cut monthly payments considerably, this method doesn’t come without risks for homebuyers. In this article, we’ll cover how debt settlement might improve or lower your chances of buying the home you’ve had your eye on.
What Factors Do Mortgage Lenders Consider For Approval?
- Credit Score
- Length Of Credit History
- Monthly Gross Income
- Loan Amount Compared To Home Value (LTV Ratio)
- Debt To Income Ratio (DTI Ratio)
- Housing Payment To Income Ratio (including taxes, insurance, and mortgage insurance if over 80% LTV)
Can Credit Card Debt Keep Me From Getting A Home Loan?
Debt can affect your ability to qualify for a home loan in numerous ways. For example, if your credit card utilization rate is above 50%, your credit score may take a hit, reducing your chances of getting the best interest rate possible for a home loan. Another way debt can impact your chances of getting the home you want is by reducing the loan-to-value ratio you qualify for.
Typically, the higher your debt-to-income ratio, the lower the loan-to-value ratio a mortgage lender will approve you for. This means you’ll have to come up with a larger cash downpayment to get approved and make the deal happen. Instead of a 10% down payment, you might need a 20% downpayment, which is another $25,000 you’d be coughing up on a $250,000 home purchase.
Another way a high debt-to-income (DTI) ratio negatively impacts home loan terms is by increasing your interest rate. Some mortgage lenders will add 0.5% or more to interest rates for every 5% increase in DTI ratio, which could easily add up to a 1-2% total interest rate increase for high DTI borrowers.
Will Debt Settlement Lower My Debt-To-Income Ratio?
Depending on your credit situation and the age of your unsecured debts, using a debt settlement program to lower your debt-to-income ratio might be advantageous, especially when considering some debt settlements can cut obligations in half or better.
Let’s say you have $30,000 in credit card debt. On average, this would equal an approximate monthly payment of $1,200. If you’re trying to qualify for a $250,000 30-year mortgage, your monthly mortgage payment would also be around $1,200 without taxes and insurance.
So, if your monthly gross income is $4,800, your DTI for the scenario above would equal 50%—potentially disqualifying you for loan approval and certainly increasing your interest rate.
If you reduced the credit card debt balance to $15,000, your DTI between credit card and home loan payments would fall to only 37.5%, which is well within the guidelines for most prime mortgage loans. Just remember, other payments like auto loans will still need to be factored in.
Can Settling My Debts Make It Harder To Get A Home Loan?
While reducing your DTI ratio can help you qualify for a home loan, there’s a chance your credit score could be negatively impacted by lowering your DTI using debt settlement. In the short term, this could increase your interest rate or even prevent you from being approved.
Debt settlement programs can vary depending on numerous factors such as current savings balance, current income, future income prospects, what type of debt it is, and how old the debt is.
For example, if you have older debts still showing on your credit report, these can drag your credit score down, hurting your chances of landing the lowest mortgage rates. If these debts are collections or charge-offs, many lenders will require them to be paid depending on their age.
These are perfect opportunities for a debt settlement program from Alleviate Financial because you have to pay those debts off anyway—it’s far better to cut those balances to preserve more
money for a downpayment on your new home.
The good news is, many lenders will allow you to settle the debts rather than pay them in full. However, always check with your mortgage loan officer to be sure before paying down debts with a settlement.
Though some borrowers find debt settlement a perfect way to purchase the home of their dreams, not every financial scenario makes sense for debt settlement. If you have recent credit card charge-offs, but no savings, debt settlement likely can’t provide you faster qualification for a mortgage loan.
Setting up a payment plan for debt settlement (rather than a lump-sum settlement offer) means the debt balance will remain on your credit report, likely disqualifying you from approval on a mortgage. Because even subprime mortgage lenders often require charge-offs less than a year old to be paid in full as a stipulation for loan approval, payment plans might not be the fastest path to homeownership.
But, all hope isn’t lost for using debt settlement. Some lenders make exceptions for loan scenarios with compensating factors such as the settlement payment falling within DTI guidelines, a recent income raise that will enable you to pay the debt faster, or a strong credit history of mortgage loan payments.
Considering Debt Settlement To Buy A Home?
If you think you might be a perfect candidate for using debt settlement to qualify for a better home finally, Alleviate Financial has settlement experts ready to answer all of your questions. Our goal is to help you alleviate your debt so you can move on to a brighter financial future, especially if that future includes a new home that you’ll enjoy for years to come. Contact Alleviate Financial today and learn what’s possible!