How does different debt affect your mortgage approval?
Do you dream of owning a home? Or are you planning on making home improvements? Your debt is a significant part of the mortgage process as your chances of getting approved for a mortgage can be affected by the different types of debt you have. Lenders will consider your debt-to-income ratio, credit score, and overall financial health before approving your mortgage application.
Let’s take a closer look at how different types of debt can affect your mortgage approval.
Federal debt
The type of debt is an immediate no-go. If you are someone that owes back taxes, you will need to clear them before the mortgage lender will consider your pre-approval.
Personal line of credit and credit card
The lender takes into consideration the entire balance to calculate an amount that you should repay each month to clear the debt. The higher the balance, the quicker it adds up to lender calculations. It works against your mortgage-borrowing potential. A lender will like to see frequent payments on this type of debt. Even with making consistent payments, the higher balance will still factor into your credit utilization rate and debt service ratios.
Mortgage debt
They are secured debt that is paid monthly. Simply put, a mortgage is the largest financial commitment that one will have. It takes a sizeable portion of your monthly income. However, since it is spread out over many years, a lender will use your potential monthly payment based on your actual payment.
HELOC debt
Completely different from a personal line of credit which is unsecured and carries a lot of debt, a HELOC is used to consolidate high-interest debt, home improvements etc. This type of debt is calculated like a mortgage rather than a percentage of the balance. Since the debt is revolving, you can increase the balance at your discretion, however, it can affect your debt service ratios.
Child support or spousal payments
Lenders will consider this payment into your debt service ratio if you’re planning on paying out. If you’re the one receiving the payments, a portion will be added to your monthly income.
Instalment debts (includes personal, car and students loans)
If you have personal, car or any student loans, they can also affect your mortgage approval. Lenders will consider your debt-to-income ratio, and a high monthly loan payment can increase your monthly debt obligations. It is advisable to pay off your loans or consolidate them into one loan with a lower interest rate and monthly payment before applying for a mortgage.
In conclusion, different types of debt can affect your mortgage approval. Lenders will consider your debt-to-income ratio, credit score, and overall financial health before approving your mortgage application. It is important to keep your credit card balance low, make timely payments on your installment loan before applying for a mortgage. If you are looking to buy a house, our mortgage brokers at Sure Loan For You can help with all your debt questions. For further enquiries, schedule a free consultation with our team at Sure Loan For You today!