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Debt to income ratio flexibility with car loan?

Debt to Income Ratio too High?

Your debt to income ratio is what determines how much you qualify for when applying for a home loan.

Debt to income (DTI) ratio will vary from one loan program to another.  If you find yourself butting up against the DTI ceiling for your loan, you must look at increasing income or lowering debt.

Reducing your debt is much easier than getting a raise.  Let’s look at this super powerful and effective way to massage your debt to income ratio.

Reducing Debt

The debt portion of a debt to income ratio is what is reported on your credit report.  Being as familiar as I am with credit reporting, I know that there’s a good chance that it’s not completely 100% accurate.

The first thing you should do is check your credit report to make sure there are no closed accounts or old collection/charge offs still reporting a payment.  It is not at all uncommon for closed accounts to still show a payment due.

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Auto Loan Solution

Auto loans can be an opportunity to reduce your debt to income ratio very quickly.

When you finance an automobile for 36 or 60 months, that financing is called an installment loan.

Here is the guideline per Fannie Mae Underwriting Guidelines:

“All installment debt that is not secured by a financial asset—including student loans, automobile loans, and home equity loans—must be considered part of the borrower’s recurring monthly debt obligations if there are more than ten monthly payments remaining.”

As is typical with most underwriting guidelines, it’s what they didn’t say that you have to pay attention to.  What this guideline also says is that installment debt with less than ten monthly payments do not need to be considered.

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If you currently have less than 10 months left on your auto loan, make sure your lender is excluding this payment from your debt to income ratio.

Pro Tip:  Reduce principle to reduce pay off

If you have more than 10 months left on your auto loan, you still have options.  You can pay down the principle balance of the loan.

Here’s how it works:  

  • Say your payment is $200 a month and you have a balance of $2,800
  • Your $200 payment for 10 months is $2,000.
  • To eliminate the $200 payment from your DTI, you would make a principle payment of $800.
  • Once you’ve made the payment, ask the auto dealer to produce a current statement showing the new principle balance.

Before paying your auto loan down, review the scenario with your loan officer.  Guidelines can change at any time and lenders can over-lay more restrictive guidelines.

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There are many opportunities to reduce your debt to income ratio.  This is one way it can be done.

Ask an Expert

If you have any questions about qualifying or increase the amount you qualify for, feel free to submit a private question, leave a public comment below or give us a call.

About the Author

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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