I'm in the process of getting a mortgage but my DTI ratio is like 40% and I am trying to just pay off the credit cards so it isn't so high (that way I will only have student loans and car payment with the mortgage lowering it to less than 36%). Do the banks look at how the credit cards were paid off? for instance (I am taking this mortgage out in my name my husband is not on it). Is it possible for him to pay off one of the cards so my DTI ratio drops or will the bank want proof/to see the money come out of my account? The credit card I'm referring to is in both of our names if that matters.
2You are asking for trouble doing what you propose. With such a high DTI, your likelihood of foreclosure is high. Pay down your debts and only then think about getting a house.– Pete B.Aug 6, 2018 at 10:50
Are you saying your current DTI is 40% without a mortgage, or that including the mortgage you're trying to get your DTI would be 40%?– Hart COAug 6, 2018 at 13:47
Your situation with this mortgage is made more complex by being married, and not including your spouse on the mortgage. The lender has to include all your debts that you are responsible for, which are students loans, car payments and credit cards. In your case t least one of those debts is a joint debt with your spouse.
It makes sense to bring those non-mortgage debts down to levels that the lender is comfortable with. But the lender is also looking for hidden debts. That is why they ask for several months worth of bank records to make sure that money used for the down payment has existed in your accounts for a while. They ask you to identify large deposits to make sure you don't have a friend or relative lending you money, which will make it hard to make mortgage payments while also paying back this undisclosed loan.
In your case somebody not on the mortgage application will be making a large payment against a credit card. If the lender notices the payment it will be explainable becasue the joint account is also your spouses obligation. In fact funneling the money through your bank account will make it more noticeable to the bank, and harder to say it isn't a loan.
Before you apply for the mortgage, if you haven't already done so, you should have your spouse avoid adding debt to joint accounts, and they should maximize payments on those joint accounts to make your application more likely to be approved.
From a personal finance standpoint you should be most concerned about your payment as a percent to your household income. As a rule of thumb a payment (PITI - Principal, Interest Taxes and Insurance (including PMI) is no more then 25% of your monthly take home pay. This is the best method to use to understand if you're taking on a mortgage that is going to make you house poor. Your high DTI is a good indicator on the risk of the loan but the risk to you is much much higher. The first rule of thumb though is you should be debt free before buying a house. You didnt specify if this is a refi or a purchase so I'll assume a purchase. Buying a home has a long laundry list of things that can go wrong that you're not responsible for as renter. When you buy a home with debt your home purchase can quickly become an overwhelming burden. As a youth I made a lot of financial mistakes and one of them was buying a house with debt. Regardless of how many debt payments you have your mortgage is always due and the payment will go up when your insurance rates and taxes adjust. I dont want to be too long winded here so I'll stop there. To maximize a safe buying experience these are recommendations: 1. Be debt free before you buy. Buying a house with debt the home becomes a curse instead of a blessing. 2. Have a fully funded emergency fund 3-6 mos of expenses 3. Total Payment no greater then 25% of your monthly take home pay. 4. Loan Product = Conventional 15 year fixed with a sizable down payment. (at least 20% to avoid PMI - PMI eats up aprox $100/mo per 100k added to your payment) take a look at the amortization schedule of a 30 yr fixed, it's not pretty
As to your direct questions: Do the banks look at how the credit cards were paid off? - Banks aka lenders look more then once when you've already started your loan process. You're better off cleaning your debt off before you apply. When you start moving money around and paying off debts especially with money not already under the loans radar you will need to prove the sources, re-submit or pull bank statements and prove where undisclosed cash has come from. - Any debt you have open on your credit report comes under your loans radar. So if you have credit card under your husbands name but you're an authorized user it becomes your debt for loan purposes. - I'm wondering why your husband isnt on the loan. You cannot include his income if he's not on the loan. Sometimes it's better to wait so both of you can qualify and the added income helps greatly.
Just remember lenders only gauge risk of your likelihood of paying them back. They dont care if you struggle or your life is bad because you're struggling. The buying requirements are still very loose and the onus is on you to do what's best for your family. Hope I helped. Good luck.