At the time of mortgage application, your credit score plays a crucial part. While determining your monthly interest rate, your credit score may increase or decrease the total amount of monthly payments. So, knowing the factors which affects your credit score is very important, specially when it comes to the debt obligations. These obligations will practically hampers your mortgage-worthiness.
What are the debts you are dealing with
There are two type of debts: 1) secured debts and 2) unsecured debts. Secured debts consists of principal amount and a collateral. If the borrower can't pay the loan entirely, the lender will recover his money by selling the collateral. Mortgage or home loan is a kind of secured debts.
On the other hand, Unsecured debts doesn't have any collateral associated with it. The borrower does not deposit any security towards his loan. For an example – in case of a student loan if you can't pay off the bank, the lender can’t take back your education or knowledge and recover the money by selling it. Thus, student loan is an unsecured debt.
So, why don't we do some R and D and know about main affecting debts which will surely hamper your mortgage-worthiness :
1. Payday loan
Normally, payday loans will not be shown in credit reports. But you have to remember that these loans are quite harmful for you. Payday loans are one of the unsecured debts which hampers credit if it is not paid off timely. The interest rate of payday loans are much higher compared to other unsecured loans.
2. Auto loan
Auto loans are kind of secured debts where the lender can get back his money by taking over the car if the borrower could not pay off the loan. The eligibility criteria of an auto loan is quite rigid. Sometimes for this quality of auto loans, your credit score can rise up to a certain level. The lenders will consider you as a financially strong and reliable borrower, if you have an existing auto loan and paying your auto loan payments without any hassle. So, you will have higher opportunities to be approved for a home loan.
3. Student loan
Basically it is an unsecured debt, and if you are paying it regularly, it won’t hurt your credit score. Student loans are considered in calculating DTI or debt-to-income ratio, so it can be harmful for your creditworthiness. But as taking a student loan and paying it off takes a long time frame, you can manage your payments and try to rip off the debt. By this way you can improve your credit score too.
4. Home loan
Mortgage or home loan is a secured debt. Every mortgage will have a proper collateral like land or building or any other tangible property. Your credit score will be in a good shape if you pay your monthly mortgage payments periodically and properly. Your current home loan debt will appear in your credit report. If you do not pay monthly payments on time or you are falling behind on your installments, a new lender will reject your new loan application. You will lose chances of getting approved for a new loan. But you will get a good chance of being approved for a home loan if you are maintaining your current home loan positively. So make sure your credit history must portray a clear picture of your income and expenditures. You’ll require a balanced DTI for an easy mortgage approval.
Normally, different type of debts in your credit report can be positive for your credit score. But it is also very unwise to pile up huge amount of debts at a time. Normally, maximum number of banks will consider DTI below 43%. They will also verify your financial strength to understand, whether you are capable to pay off all your debts and mortgage installments or not. If you can show them enough proof of your potentiality, they will blow off the whistle and wave the green signal.