Tuesday, October 28, 2008

Paying Off Debt to Qualify for a Loan

If you don't qualify for a loan because your debt-to-income ratio is too high, you are allowed to pay off debt in order to qualify for the loan. This applies to both installment debt (car loans, furniture loans, etc.) and revolving debt (credit cards).

For a conventional (non-government) loan, Fannie Mae underwriting guidelines permit it, but individual lenders are allowed to add their own restrictions on top of Fannie Mae's, so not every lender will be able to offer you the option of paying off debt to qualify. Always check with the lender to make sure it's allowed under their guidelines.

For FHA loans, every lender follows FHA guidelines, so they will all allow debt to be paid off to qualify. One additional benefit of getting an FHA loan in a case like this is that FHA allows the money that's used to pay off the debt to come from a gift from a relative.

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