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Installment and Revolving Debt Explained

By: Grant Moon 04/01/15 12:33 pm

Debt to income guidelines for VA loans really haven’t changed much over the years. In fact, I’m not sure they really ever changed. Note, the term “guideline” is important because the debt ratio isn’t a hard and fast rule as lenders can approve a loan with a higher ratio as long as the lender can justify doing so. What is the debt to income ratio?  VA guidelines say 41 and is calculated comparing total credit obligations with gross monthly income. Someone making $6,000 per month with $2,000 in total monthly debt has a 33 debt ratio for instance.

Lenders use the minimum monthly payment for credit cards listed on the credit report. Sometimes there isn’t a monthly payment listed so the lender asks the borrower to have the creditor provide a minimum monthly payment. Since the credit card is considered a revolving account, that minimum monthly payment can change from month to month. However, installment accounts are treated a bit differently.

Installment debt involves paying a certain amount each month over a predetermine period of time. An automobile loan is an installment debt. An interest rate is applied and paid out over say three to five years in most cases. Installment debt payments rarely change as most are fixed rate loans. However, the installment payment can be ignored if there are less than 10 months remaining, boosting borrowing power. This doesn’t apply to a lease, as the borrower will typically turn the car back in and lease once again or otherwise show the lender there is an additional vehicle to drive. If you have an installment account that’s hurting your debt ratios, consider paying that balance down over the next few months and get it below the 10 month mark.

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