I Have No Debt

I remember growing up and having this conversation with my father when I was about 7 or 8 years old. I asked why do I have to do all this yard work and it’s Saturday? My father’s reply was simple, “you have to pay your bills”. I was baffled as I thought to myself I don’t have any bills. Which I replied and soon regretting my reply, I asked him what bills? Well, I am sure I don’t have to tell you how long I had to stand there getting that lecture about the roof over my head, the food on the table every day, and the warm water to bath in.

Today I am a father of three but yet I find myself having this same similar conversation with no only my kids but with adults my age nearly every week. Part of the pre-qualification process is asking people what does your month debt load look like. Mortgage loan payments, car payments, credit cards etc. Then I hear those famous words, “I Have No Debt, we are debt free”. Great! Then here comes my comedic response to, “So you live rent free”, they reply “No, we own our own home, and we have no mortgage, we have no debts, everything is paid off”. I ask what about credit cards? Oh, we have them, but we pay them off at the end of every month, so I Have No Debt.”

Ok, I understand what you are saying, but here is how it works and how the government sees it under the “Ability To Repay Rule” (ATR). Similar to what my father would say, the government say’s ‘If you own a home, you still have an obligation to pay your property taxes, homeowners insurance, and if you live in an association your HOA fee’s’. These items do count towards your monthly debt to income ratio.

So, if you own two or three homes without any mortgage you still have taxes and insurance, all must be accounted for. This also gets a bit more complex when you have additional investment properties. Even though your rent pays for any mortgage loan payments, taxes and insurance, if you write too much off on your tax return for these properties you may have negative income that will count against your debt to income ratio (DTI).

Let’s jump on over to your credit card debts. I know there are people who pay off these monthly balances at the end of every month. But again, this is how it works. When your loan originator pulls your credit report whatever the balances that are currently reflecting on those cards is the amount of your current debt load. So, the minimum required payment will count against your DTI reducing your purchasing power. In order to show these as paid in full you would have to zero these out and not use them for a month prior to apply for your mortgage loan.

Remember the higher your credit score is the lower the rate you will be offered. The lower your debt to income ratio the higher your purchasing power will be. Ask questions prepare in advance, get your facts and we will see you at a happy closing table.