Should you pay off debts during mortgage underwriting? Before you decide if you should pay off debts during underwriting, you must know how your loan application calculates your credit obligations. Your credit obligations are taken against your monthly income to get your debt-to-income ratio. This ratio is then used to determine if you have a
Introduction
Should you pay off debts during mortgage underwriting?
Before you decide if you should pay off debts during underwriting, you must know how your loan application calculates your credit obligations. Your credit obligations are taken against your monthly income to get your debt-to-income ratio.
This ratio is then used to determine if you have a reasonable ability to pay for the loan you are applying for. If your debt-to-income ratio exceeds the allowable threshold, the loan may; get denied, the lender may change you to a different loan program with a high DTI threshold, or you may have to pay off some of your debts to get your ratio lower. Is there a wrong way to do this, and how do you know which debts you should pay off?
Start by talking to your mortgage representative. Their job is to help you throughout the entire loan process and help you get over the finish line. See how mortgage pre-approval works if you’re still early. You do not want to start paying off debt until you speak to them as there are requirements; they see that you do not. You may have an asset reserves requirement, and you do not want to throw yourself out of eligibility by spending those reserves to lower your debt to income. Also review what happens if your credit score dropped before closing.
Paying off your debts during underwriting
You’ll want to determine which credit obligations have the highest monthly payments. These won’t always be the accounts with the highest balance as many factors factor into the monthly payment like interest rate and term length. Only the monthly payment is factored into the DTI, so it doesn’t make sense to pay the higher balance if the monthly payment is lower than a different account.
Make sure to pay off an account but do not close it. Closing a Credit account can harm your credit score as one of the factors is the number of open accounts you have. Try to pay off credit cards before your loans, as if you pay off a loan, that account will automatically be closed.
Keep your payment confirmations and send them directly to your mortgage team. Underwriters work off the documents in your file, so your mortgage team will need to provide this information during the underwriting process.
It may seem like a creative workaround but do not pay off credit with other credit. When your credit report is reviewed, the credit bureau sends a 90-day monitoring report to the underwriter, and the mortgage team for any new accounts opened and any balance increases. The underwriter will be notified as soon as you do the balance transfer.
Do Underwriters look at anything else to determine your debt-to-income ratio?
Your credit report is not the only thing the underwriter will review to determine your ability to repay the loan. They will review all transactions that show on your bank statements to determine if there are any other reoccurring expenses. The underwriter will typically require that your lender gets a letter from you explaining what this payment is for. An example of this will be if you send money via Zelle to the same person each month. If the underwriter deems this is an obligation you are paying back, they will add the balance into your maximum debt.
Tips for reducing credit card debt
I spent the first few years in the financial service industry working in consumer banking. My goal was always to help the client be in a better financial situation by the time they left my branch. Often, this meant working with them on their credit obligations. Below are the three strategies I’ve found to be the most effective for reducing or paying off your credit card debt.
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- Consolidate your Debt: This is where you take multiple debts and move them to one debt to reduce the interest rate or the monthly payment. Financial industries have a ton of products to accomplish this. Including a debt consolidation refinance. I’d suggest seeing if they have a zero % interest card for the first 24 months to balance transfer to.
- Debt Snowball: The debt snowball method is where you focus on making all of your minimum payments and make a larger payment to your smallest debt to pay it off. As soon as the smallest debt is paid off, you’ll add the amount you made to it towards your next smallest debt.
- Debt Avalanche: While continuing to make your minimum payments, you also make a larger payment towards the card with the highest interest rate. This method is focused on saving you time and money as you’ll make more principal payments and pay less interest.
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What documents are needed when paying off credit cards during underwriting Underwriters will require
specific documentation for the accounts you’ve just paid before they mark it as paid and allow your debt-to-income ratio to adjust. The documents they will likely request are confirmation of the payment and transaction history from the account you used to pay it. Your mortgage lender will need a statement from your credit card account to order a credit supplement for a credit reporting agency reflecting the new balance.
Can I pay off debt at closing?
You definitely can if you want to pay off your debt at closing. You will need to provide your lender with all the statements for any credit card or personal loan accounts you plan to pay at closing.
Additionally, if you are doing a refinance application, you can request that your lender consolidates these credit accounts into your home loan. This may increase your monthly mortgage payments as your home mortgage loan balance may increase; however, it will more often than not be far lower than what you were paying on your credit card balances, and you will not be paying their higher interest rates. Since your mortgage payment will be lower than what you were paying on all of your debts, this will also help your debt-to-income ratio.
What can I do to make the loan process as smooth as possible?
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- Some things can help make the loan process move quickly and smoothly. After working as both a processor and a Mortgage loan officer, I’ve learned what underwriters will look for. Here is my list of things you can do to help you have a great experience.
- Provide all pages of your bank statements – even if it’s a blank page, the underwriter will still want it.
- Make sure you are saving up for the cash to close to do it in a bank account. If you deposit cash during a loan process, we cannot count it as it needs to be able to be sourced.
- Do not switch jobs during the loan process. Read about changing jobs after mortgage approval for the full picture.
- Gifts must be gifts – There cannot be any promise for the gift to be repaid; if there is a promise, then we must take 5% of the balance and add it as a new monthly payment towards your Debt to Income.
- You’ll need your email set up to send notifications to your phone – Underwriting or processing may request additional information from you via email. Replying to these emails as quickly as possible is a big way to stop delays.
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Does Paying off Debts help with my Mortgage payment?
Paying off debt can be a good investment towards getting a lower payment on your mortgage loan. Having lower balances on your total debts changes your debt-to-income ratio and will have a positive effect on your credit score as well. These two things have a big hand in driving your mortgage rate. Mortgage rates can either make your loan payment higher or lower.
What other documentation should I start saving now?
The mortgage application process may seem a bit invasive, as they want your complete financial profile documentation before getting loan approval. What documents they may request varies from person to person, depending on your income and employment situation and what assets you have. Most lenders prefer trying to get these items at the start of the mortgage loan application, so it may be a good idea to start retaining them now.
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- Pay stubs for the last 30 days
- Last two years of tax returns
- Credit statements for any credit card balances you have paid down.
- W2’s for the past two years
- Complete bank statements for the past two months
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Recap
Hopefully this gives some insight on what underwriting looks for within the loan process when trying to pay debts off during underwriting.
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Every borrower's situation is unique. The guidelines above are general — speak with a licensed loan officer to understand how they apply to you specifically.
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