What Existing Debt Means To Mortgage Lenders
Nearly all Americans carry debt at some point in their lives, from student loans to a financed automobile. While all debt affects your all-important debt-to-income ratio – that is, your monthly debt payments divided by your gross monthly income – different types of debt mean different things to mortgage lenders.
This common type of debt can actually help to improve your credit health if you make payments on time. Student loans take decades to pay off, allowing you to accrue a lengthy history of timely debt payments. This is good news to mortgage lenders, since homes also represent a debt that will likely take decades to pay off.
Auto loans are another common type of debt, so lenders expect most consumers to carry it. Since these loans are harder to qualify for than, say, credit cards, having one or more can actually reflect positively on your financial health. However, late payments or a past repossession can drastically damage your ability to get approved by a mortgage lender.
As most consumers know, these loans carry exorbitant interest rates, and they are best avoided at all costs. Still, payday loans typically won’t show up on your credit report. As long as they’re paid on time, mortgage lenders will likely be none the wiser.
Remember, carrying debt isn’t necessarily a bad thing, but it’s a balancing act to carry a large debt load while working toward a successful mortgage application at the same time. Be mindful of lenders’ likely reactions to different types of debt as you navigate the home purchase process.
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