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Will A New Lease Hurt My Loan?

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Posted On: 12/31/2014

Question: You recently wrote that mortgage borrowers should avoid new debt when applying for a mortgage. I’m eyeing a lease on a new car that will lower my monthly car payment and replace my existing auto loan. Should I wait on the lease car until after I refinance mortgage?

Answer: In the eyes of loan underwriters, car loans and car leases are pretty much the same thing: regular monthly debts. That means such payments must be added to your debts for the purpose of calculating your debt-to-income ratio.

But, of course, with mortgage rules there are always exceptions. For instance, the FHA tells lenders that “all applicable monthly liabilities must be included in the qualifying ratio. Closed-end debts do not have to be included if they will be paid off within 10 months and the cumulative payments of all such debts are less than or equal to 5 percent of the borrower’s gross monthly income. The borrower may not pay down the balance in order to meet the 10-month requirement.”

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In your particular situation you want to go from a loan payment to a lease payment and in the process reduce your monthly cost. That sounds like a good idea because the result should be less monthly debt and a lower debt-to-income ratio.

However, before going further, ask your loan officer to check with the underwriter to be sure the lease is a good idea. If you get a ruling to go ahead, I suspect the underwriter will want evidence that the old auto debt was paid off and a copy of the new lease.

The reason the lender will want written verifications is that under the federal “ability to repay” rule it must show that the borrower has, um, the ability to repay the loan. To assure that the borrower is qualified at the time of application the lender will want to have written evidence that backs up its underwriting decision. Why? Because if the loan file is not adequate there are cases where the lender might be forced to buy back loans sold to investors.

To give some idea of just how strenuous the underwriting system has become consider a recent report from VirPack, a document management company. It found that 58 percent of all loan applications now include at least 500 pages of material while 20 percent had not less than 1,000 pages of contracts, tax returns and who knows what else.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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