What to Count What to Leave

To calculate total debt ratio, lenders usually divide your monthly payments into two types: (1) installment debt, which includes loans you're paying off such as autos, boats, medical bills, and student loans, and (2) revolving (or open) accounts which include Visa, Mastercard, Amex Optima, Home Depot, Texaco, and any other credit line that remains open until you or your friendly creditor closes it.

Not All Payments Count Most lenders ignore payments for installment debts that are scheduled to be paid off within 6 to 10 months from the date of your mortgage application. But if the lease on your auto is set to end within a few months, you're out of luck. Those payments still count against you. The lender assumes (unless convinced otherwise) that you will continue to incur this expense when you lease a new car to replace the old one.

You do, though, get a break for qualifying when lenders look at your revolving debt. Even if you regularly pay hundreds of dollars more per month than your minimum payment(s) due, most lenders will only count your payment as 5 percent of your outstanding balances. Or if your minimum payment is less than 5 percent, lenders will count that lower amount instead.

Prepare Far Ahead of Time Get your debt situation shaped up as soon as you can. Not only will this fiscal fitness program lift your qualifying ratios, it may also boost your credit scores. Here are some tips:

1. Consolidate bills. One loan consolidation payment of $280 a month will hurt you less than four separate bill payments of $125 each. However, don't close three accounts and run one up close to its credit limit. Credit scoring doesn't like "high" balances relative to credit limits.

2. Pay down debt. If your installment debt has only 11 or 12 months to go, prepay two or three payments. That pushes those debts off the table and out of sight—under the rules followed by most lenders.

3. Pay off debt. If you can swing it, get rid of as much debt as you can.

4. Avoid new debt. No matter how much you are tempted, do not take on no new debt prior to applying for a mortgage. Even if you can easily afford it, you're better off waiting until after you've been through closing.

These tips especially apply if your ratios are pushing against the lender's guideline total debt limits, if your credit score falls below, say, 700, if you're requesting a low-down-payment loan (a loan-to-value ratio of greater than 80 percent), or if you're trying to qualify for a non-owner-occupied investment property.

A pint-sized debt load will help offset any warts in your credit profile.

Emergency Quick Cash

Emergency Quick Cash

At least once in every person’s life comes a time when the need is great and the resources are few. It can be hard enough to make ends meet on a decent wage, but, when the times get tough and the money just is not there to meet the need, a person can easily despair.

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