Loan Qualification and Short Term Debt


Are short term debt obligations factored into the size of the loan you qualify for? I have 12 months left on a car loan and I am trying to decide if I should just pay it off in full now.


It depends on who the investor is. Often (if the investor is using Freddie Mac or Fannie Mae guidelines), short term INSTALLMENT debts are not counted if there is less than 10 payments remaining. If it is a revolving account (credit card, HELOC, etc…) then the payment reported on the credit report will be counted regardless of the balance. If you pay the installment balance down to where there are fewer than 10 payments left, the investor will likely not count it against your ‘debt-to-income’ (DTI) ratio. Only paying a portion of the balance down will allow you to keep a higher balance in your checking/savings account that may result in a more favorable loan determination.

Answered almost 10 years ago
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