Your credit score can make or break your mortgage approval. It can determine whether you get your dream home or not. Let’s take a look a how your debt affects that score.
There are two types of debt: secured and unsecured. The money you borrow to buy a house gives the bank some security that it can recover the money if you don’t pay the debt, meaning the debt is secured. The money the bank can’t reclaim, when you use your credit card or student loans, is considered unsecured debt.
The following consumer loans can affect your mortgage in different ways:
- Student Loans
Student loans are unsecured debt, but because they often take decades to pay off, when you pay your bills on time it can actually help your score. Keep in mind that a large student loan will figure into your overall debt-to-income ratio, though, so it might affect your ability to qualify for a mortgage.
- Auto Loans
Auto loans are secured debt, because the lender can repossess the car if you don’t pay. They diversify the types of debt you have and they are harder to get than credit cards, so mortgage lenders may look at it favorably.
- Payday Loans
Payday loans are unsecured, because the lender doesn’t have any collateral. They usually don’t show up on your credit report unless you default on the loan, which would affect your score negatively.
- Existing Mortgage Loans
Mortgages are secured debt. When paid on time they are great for your credit score. But if you’ve missed a payment on previous mortgages you’ll make your new lender nervous. If you already have a mortgage and are applying for a second one, the new lender will want to look closely at your debt-to-income ratio, to be sure you can afford to make both payments every month. If your second mortgage is for a rental property, most lenders won’t count rental income until you’ve been a landlord for two years.
Remember to make your payments on time. If an account becomes 30 days past due, you can lose a lot of points. You don’t need to borrow a lot of money to build a credit score, you just need one transaction that you pay in full each month to do well. Don’t close a credit card when you pay off your debt, keep the account open: people with the best credit scores only use a low percentage of their available credit. Last but not least, review your credit report from all three agencies and dispute incorrect information. You can download for free from AnnualCreditReport.com.
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