Payoff or Paydown of Debt for Qualification
Payoff or paydown of debt solely to qualify must be carefully evaluated and considered in the overall loan analysis. The borrower’s history of credit use should be a factor in determining whether the appropriate approach is to include or exclude debt for qualification. Generally,
- Installment loans that are being paid off or paid down to 10 or fewer remaining monthly payments do not need to be included in the borrower’s long-term debt.
- If a revolving account balance is to be paid off at or prior to closing, a monthly payment on the current outstanding balance does not need to be included in the borrower's long-term debt, i.e., not included in the debt-to-income (DTI) ratio. Such accounts do not need to be closed as a condition of excluding the payment from the DTI ratio.
See B3-6-02, Debt-to-Income Ratios for additional guidance on calculating total monthly obligations for qualifying purposes.
See also B3-6-07, Debts Paid Off At or Prior to Closing for additional information.