May 9, 2015
A reader asks, “My question is about what debt matters and witch debt doesnt.I have 4 debts that have been removed from my credit report according to credit karma and 1 credit card that is closed but I owe 1100 dollars on.”
Any current debt (outside of student loans under qualifying deferment plans and qualifying medical debt which may be viewed by the lender in a different way depending on circumstances) may affect a borrower’s debt to income ratio calculation for an FHA loan.
Anything that has dropped off your credit report won’t be an issue–if it isn’t on your credit record chances are it’s not a factor in the loan approval process unless there’s some record of missed or late payments associated with the accounts that does exist. When it comes to the items on your credit report, how your current financial obligations affect your debt-to-income ratio is definitely important.
Borrowers with too much debt and not enough income won’t be deemed a good credit risk without what the FHA calls “substantial compensating factors” that make up for the high debt ratio. A lender may make an exception for a borrower with high debt if the borrower has substantial cash reserves or other factors that could help.
In general, the best policy is for the borrower to try to reduce the amount of debt before applying for a home loan–the lender wants to see your debt to income ratio both before and after the proposed loan payment to determine whether you can afford both your current monthly obligations and the new mortgage.
If you need help in this area, contact the FHA directly by calling them at 1-800 CALL FHA and ask for a referral to a local HUD approved housing counselor who can give pre-purchase counseling and advice on getting to the best financial place you can before applying for the new loan.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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