Mortgage Guidelines for Debts and Liabilities

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Liabilities in Mortgage Lending
In my previous post, How Mortgage Companies Document Employment and Income, we touched on the income used to qualify borrowers. Income is only half of the equation used to figure an applicant’s ratios. The other half is debts or liabilities.

Debts that are generally used for qualification purposes:

• Revolving debts (credit cards, some credit lines, etc.)
• Installment debts (auto loans, boat loans, etc.)
• Auto lease payments
• 1st and 2nd Mortgages, including Principal, Interest, Taxes, Insurance and Association Dues on any real estate owned and not rented.
• Alimony Payments
• Child Support Payments

The 10 Payments or Less Mortgage Rule
Payments on installment debts, child support and alimony are not usually counted if there are 10 payments or less (in some cases it’s 6 payments or less!) remaining on the loan. This does NOT apply to leases, as the mortgage company will assume that the borrower will be leasing again at the end of the term.

Debts that are generally not used for qualification purposes:

• Utilities (gas, electric, phone, cable, etc.)
• Insurance (other than homeowner’s)
• Mobile phones
• Taxes (other than property insurance)
• Groceries or personal expenditures
• Certain collateralized debts, such as stock margin accounts

Purchasing a Home, Without Selling the Current One
There has been a lot of interest from borrowers lately who are intending to purchase a new home without selling the old one. Under previous rules, as long as borrower’s had a valid lease agreement on their current home, they could use that money to offset their current mortgage payment. Those days are long gone. Now, applicants wishing to buy a new primary residence without selling the old one have to qualify with both mortgages (including taxes, insurance and association dues.) In order to use rental income to offset a mortgage payment, the rental income must be shown for 2 years on filed Federal Tax Returns.

Is it on your Credit Report?
Basically, if it appears on the borrower’s credit report, mortgage companies will count it as a liability (with the exceptions noted above.) In my next post, we will take a look at ratio calculation.
Questions? Please leave them in the comments!