4 loans that affect your mortgage creditworthiness
When shopping for a mortgage, your credit score is very important; this can make or break your mortgage approval and ultimately determine whether you get that home for sale in Boca Raton, Florida. But before analyzing your credit score, it’s important to consider how your existing debt affects that score.
Debt is of two types: secured and unsecured. When you borrow money to buy a house, the bank can repossess the house to get their money back if you don’t pay the debt. This means that the debt is secured – it is weighed against something you want to keep and gives the bank some security to get the money it loaned you back. Unsecured debt, on the other hand, means the bank can’t get back what you buy with the borrowed money. (Credit card debt and student loans are unsecured.)
The following four major consumer loans affect your mortgage creditworthiness in different ways. Read on to find out what steps you can take to improve your credit if you have these loans (or are considering them), so that you can qualify for the best mortgage rates.
1. Student loans
Student loans are unsecured debt, but they are not necessarily bad for your credit score if you pay your bills on time. Because they often take decades to pay off, student loans can really improve your score. Likewise, other loans held (and paid regularly) over a long period of time increase your score. However, student loans will figure in your overall debt ratio, so a large student loan or other loan could affect your ability to qualify (and afford!) A mortgage.
2. Auto loans
Auto loans are secured debts because the lender can repossess the car if you don’t pay. In some cases, auto loans increase your credit score by diversifying the types of debt you carry. And because auto loans are harder to get than credit cards, some mortgage lenders may view you favorably because you’ve already been approved for a loan that wasn’t a slam dunk.
3. Payday loans
Payday loans usually don’t show up on your credit report. But if you don’t pay back the loan, it could hurt your credit. These loans are unsecured – the lender has no collateral – and their interest rates are often exorbitant.
4. Existing mortgages
Mortgages are the classic example of secured debt because the bank holds the ultimate collateral: real estate. Mortgages, when paid on time, are great for your credit score. However, missed payments on previous mortgages will make your new lender nervous.
If you already have a mortgage and are applying for a second, the new lender will want to make sure you can afford both bills each month. It will therefore take a close look at your debt-to-income ratio. If your second mortgage is for rental property, you can expect rental income to be factored into the income calculation. However, most lenders won’t count rental income until you’ve been a homeowner for two years. Until then, you will need to qualify for any additional mortgages using documented income from other sources.
How have your loans affected your ability to qualify for a mortgage? Share your tips in the comments below!