Can They Force You To Pay Off Your Car or Other Debts In Order To Get A Loan?

| | Comments (0)

The short answer is not only "yes" but "damned straight"

I refinanced my house, and the lender put as one of my payoffs my Acura lease that I have 3 years left, whick equals about $19,000. I told him that was a lease and not a credit card, and he said he would take it off. I'm supposed to get my money tomorrow wired to me, but when he sent me a good faith estimate to sign today the Acura lease was still there. He said I would have to take it like that cause he forgot. I'm not gonna pay $20,000 on a 3 year lease left for a 30 year fixed rate refi!!! In the end I will have paid over $40,000 for a car I will only have for 3 more years. Can he do this to me? I need the money and signed everything else??? Please help

The first thing you have to understand is that THE most important measure of whether you can likely afford a loan is your debt to income ratio. If you make $5000 per month gross and you have to pay $3000 of it in debt service that's a 60% debt to income ratio.

Debt to income ratio is total cost of housing PLUS contracted monthly outlays divided by gross monthly income. It includes student loans, car leases as well as car purchase payments - everything you have contracted to pay out on a periodic basis. They want to measure how well you can afford to make payments out of continuing income. In the email quoted above, I see warning signs of being over-extended already.

For myself, I don't like the idea of refinancing a short term debt into a long term debt. I don't like suggesting it to clients - while debt consolidation refinance can be powerfully beneficial, there are huge traps that most people fall into. The benefits only happen if you keep making the equivalent of the same payments, and only if you keep doing it longer than the consolidated debts would have lasted. If you're doing it for reasons of cash flow, the only justification is to keep yourself out of bankruptcy. This person seems to understand that debt consolidation is generally a bad thing, but wants some cash out that they really can't afford.

That is the only reason a loan officer should broach the idea of debt consolidation. Unfortunately, it happens far too often because loan officers are paid on the basis of loan size. Larger loan equals bigger paycheck. Also, all too many consumers understand only cash flow, and that cutting their payments means they apparently have more money to spend on entertainment, travel, toys, or whatever else their personal desires point them towards.

The basic challenge illustrated, however, is that in order to qualify for the loan, this person does not make enough money - or hasn't proven they make enough money - to satisfy the underwriting guidelines on debt to income ratio. In plain English, they cannot afford the loan they are contemplating. Perhaps they could afford it if they only had the home loan, but they have car payments, car leases, student loans, credit cards, and installment payments on other goods as well. All of these are contracted monthly outlays. You must continue to pay them.

(Believe me, you don't want to tell a prospective lender you want to stiff existing creditors! They don't take it well)

The homeowners nonetheless want the money. The email didn't say why, but I strongly suspect it's a desire rather than a need. So the loan officer is trying to find a way to get it to them by qualifying them for the loan. It's within the context of serving the client's perceived "needs", and yet it rarely serves client interests. There are damned few loan officers who reflexively use this kind of red flag as a reason to sit and and consider whether the client real interests are served by the loan; after all, if the answer is "no" they don't have a loan and they don't get paid. I try, and I usually find out later that they got a worse loan from someone else because they didn't want to tell me they appreciated my concern but wanted to do it anyway. Nonetheless, if loan officers supposedly have a fiduciary responsibility (and we do) it should be an obvious requirement for situations where the client may be compromising their long term ability to afford the loan. I doubt the results of the Era of Make Believe Loans would have been so devastating if consumers in this situation had some mandatory protections in the form of counseling on the effects of getting this money. This is one thing that should have been done in response to the over-extension of credit to so many homeowners, and wasn't. Might have something to do with the fact that the big banks make large campaign contributions, while homeowners, not so much.

There are tricks that enable the lowering of debt to income ratio, and debt consolidation is the chief of those. It has perils for the consumer, but it does exist. By spreading the principal payments over 30 years (and usually by lowering the interest rate), debt to income ratio can be greatly lowered. This gets the loan approved, which means the consumer gets the money they want and the loan officer and their company get paid. Win-win in the present tense. All too many of these, however, sabotage that homeowner's financial future - it just takes a while for that to be apparent.

Keep in mind, the question is not "Do they owe this money?" They do. There is no question about that. Nor are their existing debts the moral responsibility of a real estate loan officer. The question is whether a way to restructure the debt exists that both qualifies this homeowner for the new loan they want, and does not unduly compromise their financial future. The question for the lender and the underwriter, however, is even more concrete: Does the new loan or loan structure comply with underwriting guidelines such that there is a reasonable expectation of future payments being made on time? That is the bottom line. If the projected monthly payments are too high, the answer to the question is "no", so people go looking for ways to lower those monthly payments and change the answer to "yes."

A $500 car payment that would have been paid off in 3 years may add only $100 or so to a real estate loan payment. If the homeowner makes $5000 per month, that cuts their debt to income ratio by about 8% right there. For a loan officer, 8% off Debt to Income Ratio is a huge amount, and I've seen situations where debt consolidation cuts 20% off a Debt to Income ratio. When 45% is the cutoff, consolidating debt can make a huge difference in a homeowner's ability to qualify. The trick is for it not to lock the consumer into a situation where a year from now they've got to have a new car to get to work because the old one disintegrated, and there's just no way they can afford it. The lender and underwriter do not care about that. They care whether the projected monthly cost of housing plus debt service is within guidelines.

I don't know by how much, but its apparently this person is in that kind of situation. They want the money, but given their other debts, they can't afford it without consolidating their other payments into the loan. The homeowners have the right to refuse, but then the lender has the right to refuse to fund the loan. It is a strict quid pro quo: cut your payments by this much (in addition to whatever other underwriting requirements there may be) and we will fund your loan. Don't, and we won't. While declining to consolidate may be the smart thing to do in many situations, most consumers decide they want whatever benefit the loan has enough that they decide to do what the lender requires. It is the homeowner's choice, but the bottom line is that if you want the loan in such a situation, then yes you have to do it.

Caveat Emptor


Delicious Bookmark this on Delicious StumbleUpon Toolbar Stumble It!
Please be civil. Avoid profanity - I will delete the vast majority of it, usually by deleting the entire comment. To avoid comment spam, a comments account is required. They are freely available, and you can post comments immediately. Alternatively, you may use your Type Key registration, or sign up for one (They work at most Movable Type sites) All comments made are licensed to the site, but the fact that a comment has been allowed to remain should not be taken as an endorsement from me or the site. There is no point in attempting to foster discussion if only my own viewpoint is to be permitted. If you believe you see something damaging to you or some third party, I will most likely delete it upon request.
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.

Leave a comment

Copyright 2005-2022 Dan Melson All Rights Reserved

Search my sites or the web!

The Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
What Consumers Need To Know About Mortgages Cover

The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
What Consumers Need To Know About Buying Real Estate Cover

Buy My Science Fiction and Fantasy Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read

The Man From Empire
Man From Empire Cover
Man From Empire Books2Read link

A Guardian From Earth
Guardian From Earth Cover
Guardian From Earth Books2Read link

Empire and Earth
Empire and Earth Cover
Empire and Earth Books2Read link

Working The Trenches
Working The Trenches Cover
Working the Trenches Books2Read link

Rediscovery 4 novel set
Rediscovery set cover
Rediscovery 4 novel set Books2Read link

Preparing The Ground
Preparing the Ground Cover
Preparing the Ground Books2Read link

Building the People
Building the People Cover
Building the People Books2Read link
Setting The Board

Setting The Board Cover

Setting The Board Books2Read link

The Invention of Motherhood
Invention of Motherhood Cover
Invention of Motherhood Books2Read link

The Price of Power
Price of Power Cover
Price of Power Books2Read link

The Fountains of Aescalon
Fountains of Aescalon Cover
The Fountains of Aescalon Books2Read link

The Monad Trap
Monad Trap Cover
The Monad Trap Books2Read link

The Gates To Faerie
Gates To Faerie cover
The Gates To Faerie Books2Read link

C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information

Questions regarding this website:
Contact me!
dm (at) searchlight crusade (dot) net

(Eliminate the spaces and change parentheticals to the symbols, of course)

Essay Requests

Yes, I do topic requests and questions!

If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!

Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
Learn something that will save you money?
Want to motivate me to write more articles?
Just want to say "Thank You"?


Add this site to Technorati Favorites
Blogroll Me!
Subscribe with Bloglines

Powered by FeedBlitz

Most Recent Posts
Subscribe to Searchlight Crusade

About this Entry

This page contains a single entry by Dan Melson published on February 22, 2021 7:00 AM.

Loan Qualification Standards: Qualifying Rate and Payment was the previous entry in this blog.

Mortgage Rate, Points, and Closing Costs is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.


My Links