4 Loans That Affect Your Mortgage-Worthiness

There are different types of debt available to you so that one day you can boost your credit score. Don’t be fooled by the system that is always telling you to borrow, being in debt is never a good thing and it can actually hurt you if you over-borrow.

Searching for a new mortgage is something every homeowner must do (except the stupid rich ones) and your credit score matters here. It can make or break the mortgage approval, and even determine which if you get the house you want.

There are two types of debt: secured and unsecured. When borrowing money from a bank to buy a house, the bank has the option of taking back the house if you default. This is a secured debt. It is balanced against a tangible object as a security measure. Unsecured debt is something the bank cannot get their hands on in case you default on your payments. An example of unsecured debt is student loans and credit card debt.

Let’s take a look at the four key consumer loans that make our lives hell. These will be a mix of secured and unsecured debt on your credit score – and ultimately your mortgage worthiness.

Student Loans

Student loans are unsecured debt. These aren’t a bad mark for your credit score if you pay your bills on time. Because they take decades to repay, these can actually help your credit score. Loans that take a many years to pay off have the possibility to boost your credit score. These can be figured into your debt-to-income ratio, so they might affect your ability to afford a mortgage.

Auto Loans

Auto loans are secured debt because the lender can reclaim the car if you default on your payments. This type of debt has the possibility of raising your debt score by diversifying the type f debt you carry. Since auto loans are more difficult to get than credit cards, some lenders might see this as a good sign. They will see you have gained a loan that wasn’t particularly in your favor. This will increase your chances of getting that mortgage.

Payday Loans

Payday loans don’t typically appear on your credit report. Defaulting on this could hurt your credit score pretty bad. As unsecured debt, the lender doesn’t have any collateral, and the interest rates are often times stupid high.

Existing Mortgage Loans

There’s already collateral when you have a mortgage, and this is the house you are currently living in. When paid on time, these are like Miracle Grow for your credit report. Missing payments will definitely hurt your credit score and make the lenders nervous.

If you are applying for a second mortgage, the lender wants to ensure you can pay both bills every month, so they will be putting your debt-to-ratio under a microscope. If your second mortgage is for a rental property, you’ll be expecting the rental income to count toward the income side of the equation. However, most lenders won’t recognize your rental income until you’ve been a landlord for two years.

Overall, having different types of credit can boost your credit score. It isn’t always bad to have student loans, auto loans, and others when applying for a mortgage. B careful though, over borrowing can hurt you. Lenders will be looking for your debt-to-income ratio less than 43%, looking at all the money you owe, and the monthly payments on all of the debt. They want to see your income is enough to cover all your debts, including the new mortgage you apply for. 

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