How Liabilities Figure in the Mortgage Process

Lenders are concerned about liabilities just as much as assets during the mortgage process.

There are several types of liabilities, including revolving and installment debt, as well as collections, liens and judgments.

Revolving and installment debt

Revolving debt refers to debt on which you make payments monthly, such as credit cards and home equity lines of credit; both the balance and the payment fluctuate. A good rule of thumb is to keep the balance on all revolving debt within a 20–30 percent range of your limit. Any higher, and they may have an impact on your credit score.

Installment liabilities are those where you make the same payment each month, such as a car loan. At some point, the balance will be paid off.

Installment debt can be excluded from debt ratios when there are fewer than ten payments left, as long as it isn’t paid down specifically for this purpose. This can be extremely helpful when you are qualifying for a home, because the $200 to $300 per month or more you pay monthly in installments may make a huge difference in debt ratios.

Collections, liens and judgments

Collections, especially those that are older and have lower balances, may or may not need to be paid off prior to closing; they may lower your credit score in the short term. Judgments may be able to remain in place as long as you can prove that you have been making payments consistently for at least 12 months, otherwise they will need to be paid in full.

Liens, specifically tax liens, must be addressed. These are particularly problematic for borrowers, because in the liability hierarchy they take priority over even mortgage debt, and must be satisfied in the event of a mortgage default.

Lenders want nothing to do with them and want them gone before they will lend you money.

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