Installment Debt verus Lease Agreements



We are in the middle of a series on debt. The first two weeks focused on the steps to take if buying a new home without selling your current home. The next posts focused on student loan debt. Today, we’ll take on installment debt.

Note that mortgage debt and installment debt are not the same thing. For example, installment debt refers more to car loans, boat loans, or a personal line of credit. This isn’t an exhaustive list, but a list to give an idea of what is meant by an installment debt.

When buying a home, installment debt is pretty straight forward. You have borrowed $x.xx amount and will pay it back over X number of months. Not much to it really. That said, there is a twist.

If there are less than 10 payments remaining of an installment loan (whether it is a car, boat, personal loan, etc.), we can ask the underwriter to ignore the debt. The logic is simple… with less than 10 payments remaining, that installment debt won’t have an impact on making the new mortgage payment. The underwriter can always say “no” to the request, but it is one that we can make.

There is one exception – Lease Agreements. The most common example is when a home buyer leases a car. Even if there is one lease payment remaining, the debt cannot be ignored. Why? At the end of the lease, the car goes back to the dealership OR it has to be purchased. Unless buying a car in cash, that means the our client looking to buy a home either leases a new car OR gets a loan to purchase a car.

Either way, an underwriter views a lease payment as a continuing debt until it is satisfied and we document that a new lease/car loan was not used to get another car.

You might be in a situation where you think your situation will improve to buy a home in a few months when a car lease is up. Depending on how you get your next car, that might not be the case. If buying a home in the state of Georgia, we can talk about installment debt (or any other debt topics) from this series. Contact me today. You can find my contact information at the bottom of this page.


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