Can my parents payoff some of my debt so we qualify?

Question of the week:  Can my parents payoff some of my debt so we qualify?

Answer: With higher rates many homebuyers are looking to maximize their qualifying ratios to buy their new home.

Dennis, what are qualifying ratios?

Qualifying ratios, or debt-to-income ratio, or DIT, is your monthly house payment plus monthly credit payments divided by your gross income.

For example, if you make $10,000 per month, your proposed new housing payment will be $3500 (this is mortgage principal and interest, property taxes, property insurance, PITI), you have a $450 auto loan, $150 per month for minimum credit card payments, and pay $325 for student loans.

Your housing payment plus credit payments total $4425 per month. Divide the $4425 by your gross income of $10,000 and the result is 44.25%. This is your debt-to-income ratio.

Depending on the loan program the maximum DTI you may have can be from 43% to 49% (unless you are using VA eligibility). In the case above, you would likely qualify for many mortgage products.

Consider the same income scenario, but your proposed new housing payment PITI is $4300 per month. Adding in your auto, credit card, and student loan payments total $925, for total payments of $5225 per month. Your DTI is 52.25%, you do not qualify.

Most loan programs allow you to pay down debt to qualify. In this instance your auto loan balance is $7800, your credit cards total $7500, and your student loan balances are $27,500. The loan program you are using allows your DTI to go up to 49% since you have a very strong credit score and significant reserves after closing due to your 401(k)-retirement account.

To put more money down to lower the loan amount, and therefore the payment, is not possible as you are using almost all your available cash for down payment and closing costs.

However, if you payoff your credit cards and auto loan*, your DTI drops to 46.25% with just the new house payment and your student loans. If you do this and the underwriter has seen a credit report with the higher balances, and then we present a report with those accounts paid off they underwriter will require proof of funds used to pay off the accounts.

One option to do this is to borrow the $15,300 needed to payoff these account from your 401(k) to payoff the accounts. Because the repayment of the 401(k) loan is through your paycheck the payment will not count as part of your DTI. Presenting documentation for the 401(k) loan, terms of repayment, and verification the funds left your retirement account and were deposited into your bank account will be required.

Another option is that your parents have offered to help with some cash if needed to help you if needed. So instead of getting the funds from your 401(k) your parents make payments to your auto lender and credit card companies to payoff the accounts.

Question of the week: Can your parent’s payoff your debt so you can qualify?

Yes.

But.

Any funds coming into the transaction that are not your own need to be verified as to their source to ensure that the funds are not borrowed and come from an acceptable source. In this case your parents are an acceptable source.

Because they already made the payments to the creditors the verification process to enable the funds to be eligible to the underwriter is a bit more onerous than if they had simply transferred the funds to you directly and you paid off the accounts. In this case the documentation would be to show the funds in your parents account, verification they paid the funds to the creditors with copies of cancelled checks, or bank statement showing ACH transfers. As well, a gift letter would be required in which your parents attest the funds are a gift and are not expected to be repaid.

If the funds are directly transferred to you, the requirement for the funds to be accepted would be bank statement showing your parents had the funds, proof the funds left their account and went into your account with either a cancelled check or bank statement showing the funds being transferred, a statement from your banks showing the deposit.

Situations such as this are why it is extremely important to get fully pre-qualified, including a credit report, before starting your home search. With all the needed information for your income, credit obligations, and funds available, we can strategize “what if…” for different home prices, interest rates, and loan programs. This may entail paying off, or down, debt, accessing more funds for the transaction, or adjusting sales price and/or loan amount for your new purchase.

*For most loan programs if there are ten or fewer payments left on the installment payment, the payment is not counted in the DTI calculation. In this case, instead of paying off the auto loan for $7800, paying the balance down to $4500 (10 x $450 per month) will result in the payment being left out of the DTI. This saves $3300 in cash to lower the DTI to get approved.

If you, or someone you know, is considering purchasing a home soon, or in the future, contact me to make sure the resources are available and properly allocated for a successful closing on your new home.

Have a question? Ask me!

Not good news. That is the short take away from the Bureau of Statistics Consumer Price Index data this morning. Often there is a glimmer of positive in economic data that in the whole picture are negative, not so today. The CPI rose 1% in May, year over year prices are up 8.6%, the highest since 1981. Pun intended, fueled by gas prices which rose 4.1% from April. Energy costs impact virtually every consumer item, simply because of transportation costs, but have a very large impact on food as not only transportation but cultivation is also very reliant on petroleum by-products. Food prices are up 12% from May 2021.

The “core” rate of inflation is the number that the Federal Reserve uses as its gauge of prices in the economy because it is more stable since food and energy costs are stripped out. Not a lot of good news there as the core rate increased 0.6% for the month, near the expectation for the full CPI growth, and is up 6% from May 2021.

Piling on the negative news, inflation is moving from goods to services. Typically, inflation takes a while to move from groceries, gas, shoes, rent, to services, that “while” has arrived in the U.S. economy. The concern with this transition of higher costs is that once service costs go up they do not come down, making the inflation permanent. Across all sectors, “real” wages, income after accounting for inflation, dropped 0.6%, for the same income to purchase the same goods and services, workers will need to dip into savings or use credit.

Rates for Friday June 10, 2022: Rates were climbing all week before CPI data came out this morning, today’s news pushed them even higher. Rates are up 0.50% from last Friday as investors look to protect their funds from further declines in values.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30-year conforming                                        5.375%                Up 0.500%

30-year high-balance conforming                   6.00%               Up 0.500%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Sobering news for the economy with no short-term fixes available. Summer is typically a very high consumption month as families take trips, go out more, and typically spend time and money with family. What impact inflation will have on this summer’s spending is not known. From our stand-point, Leslie and I embark on a summer drive trip later this month in the Southeast. I am glad we will be paying about $1-1.50 less per gallon than if we were doing a drive trip in California.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog