Written by Peoples Bank Senior Mortgage Loan Officer Whitney Tjoelker
In the current market, finding a home is challenging enough; buying a home doesn’t have to be. Throughout my 16 years at Peoples Bank in the real estate lending industry, I’ve learned many things, but few of them have proven as valuable to my clients in terms of setting them up for future success as organizing their debt.
What does ‘organizing debt’ mean?
I’d like to say I coined the phrase, but the reality is I likely heard it from one of my mentors through the years and I’ve started to subconsciously pass it off as my own. The phrase itself is less important than its meaning.
All loan payments and associated debts need to be considered when qualifying an applicant. This means student loans, car payments, medical expenses, etc. Home loan specialists don’t weigh specific types of loan payments differently than others. It’s our job to understand and account for all loan payments and use the information to determine what a qualifying payment should be. For example, there are instances where paying down a debt to a specific threshold can exclude it from your debt-to-income ratio.
Not all debt is created equal
It’s not always necessary, or the best idea, to pay all credit card debt off prior to applying for a loan. I like to work with my borrowers to determine what the best course of action is for qualifying and then create a plan for the loan. If paying off a credit card or car loan decreases an applicant’s cash reserves more than it decreases their debt-to-income ratio, then it’s not a responsible recommendation. Ultimately the decision falls to the borrower, but I take pride in providing the appropriate context for each situation given my experience. This can often create less frustration later and helps all parties consider the full financial picture and use the funds the borrower has in the most impactful way possible.
With an average monthly payment for a new car at just over $700 per month according to Experian, and auto loans being the second highest percentage of consumer debt (behind only mortgages) according to Equifax, it’s no surprise that many borrowers are applying for home loans with an auto loan already on their books. The good news is that auto loans are straightforward; we simply use the agreed upon monthly payment when that loan was made.
Student loan payments can be assessed differently. Depending on the type of loan and the status of the loan, there are different steps we can take. For example, if a borrower has deferred payment on a student loan the general rule is that we calculate a monthly payment in the amount of 1% of the outstanding balance, as long as there’s no payment reported on the credit report.
Why does all of this matter?
It’s about getting you the best deal possible and setting you up for future success. It’s why Peoples Bank trumpets the idea of “local lenders, local decisions”, and why we pride ourselves on looking at the full picture. The numbers on the application may say one thing but upon closer inspection, may indicate something entirely different, and all of this informs the recommended solution.
What can you do right now?
The best thing you can do is take steps to build your credit. If you carry balances on revolving accounts such as credit cards, try to keep them at 30% or less of the credit limit. It’s a good idea to keep your oldest accounts open as your credit history is averaged between the oldest and newest accounts. One of the most important credit building tactics is to always make your payments on time. Late payments negatively impact your credit score and can stay on your credit report for years. Another helpful tip that I always give to my clients is: do not open any new accounts during the loan process if you can help it. Your credit report is monitored throughout the entire transaction and opening a new account can derail the process.
If you’re still at a loss for what to do next or are ready to start the process, setup a meeting with me, or any of the Peoples Bank lenders. That’s what we’re here for. We’re here to listen to your story and answer your questions. Everyone has a past, it’s our job to help you secure the future you deserve.
To learn more about mortgages at Peoples Bank, visit us at at https://www.peoplesbank-wa.com/home-loans
About Peoples Bank
Peoples Bank is a locally owned and operated, independent full-service community bank with $2.4 billion in assets. Headquartered in Bellingham, Washington, Peoples Bank has been serving the community for 100 years and operates 23 locations throughout Washington. Reflecting its strong financial management practices, dedicated employees, and long-standing customer relationships, Peoples Bank was awarded a superior five-star rating from BauerFinancial, a leading independent bank rating firm. Learn more about Peoples Bank at www.peoplesbank-wa.com. Equal Housing Lender. Member FDIC.