Different Loans That Could Impact Your Creditworthiness in the Eyes of Lenders
When you’re searching for a home loan, you probably know that your credit score is a huge deal since it could make or break your chances of getting approved. However, before nitpicking your credit score, it is imperative that you look into your other debts and how these impact your credit score.
Your Car Loan
Your auto loan is a secured debt since your lender could repossess your vehicle if you default on your loan. In most cases, however, a car loan is great for your credit score since it diversifies your debts. Likewise, since it’s harder to obtain than a credit card, some lenders might see it as a positive.
Your Student Loans
Although student loans are a type of unsecured debt, they won’t necessarily impact your credit score if your payments are on time. And because they’re typically paid off in decades, they help your credit rating. Also, other loan types, considering that you consistently repay them on time and hold them for a long period could raise your credit score.
However, a home loan specialist in Tempe warns that student loans would also count toward you overall DTI or debt to income ratio, which means that a substantial student loan could impact your ability to be eligible for a home loan.
Your Other Home Loans
Home loans are secured debt since the lender holds a vital collateral, the borrower’s house. When repaid consistently on time, however, a mortgage would positively impact your credit score. On the other hand, missed or late payments on your other mortgages won’t sit well with prospective mortgage lenders.
Your Payday Loans or Something Similar
These won’t typically be included in credit reports. However, defaulting on a payday loan would affect your credit rating. Additionally, these loans are unsecured debt and come with very high-interest rates.
Now that you know how these different loans could impact your creditworthiness in the eyes of prospective mortgage lenders, you have to learn how to navigate the ins and outs of these consumer loans to make certain that your credit worthiness stays intact.
Why Is Your Debt-to-Income Ratio So Important?
Your debt-to-income ratio or DTI is made up of your overall debt payments each month divided by your monthly gross income. This crucial number is important to lenders since they use it for measuring your ability to handle your mortgage payments monthly.
The Importance of Your Debt-to-Income Ratio
On your end, your DTI is vital since it can tell you plenty of things about your financial health. For instance, let’s say your debt is 60% of your monthly income. This means that you’ll have a hard time paying off your debts if there’s a sudden change in your circumstances, such as a medical emergency. You would also have a more difficult time repaying your debts than another person with a 25% DTI.
From lenders and creditors’ perspectives, your DTI is a critical measure of borrower risk, explains a loan officer from a renowned mortgage lender in St. George. Borrowers with higher DTIs have a higher chance of defaulting on their home loans. When applying for a home loan, determining your DTI would be a huge component of the underwriting process. Generally, the highest debt-to- income ratio you could have is 43% if you want to qualify for the best mortgage deals.
What This Means for Your Mortgage
What’s the ideal debt-to-income ratio? In general, lenders peg the ideal DTI ratio below or at 36%, meaning that yours shouldn’t be higher than that. This magic number would afford you more room than if your DTI is, say, 43%, which leaves you less susceptible when your expenses and income change. But if you could manage your financial situation to put your DTI significantly lower than 36%, say between 18% and 24%, then you would be so much better off.
Your debt to income ratio plays a vital role in whether or not you get approved for a mortgage. A DTI lower than 36% is perfectly fine for mortgage lenders, a DTI below 20% is excellent, while anything that’s higher than 36% is considered risky for mortgage lenders. Put simply, the lower your debt-to-income ratio, the more mortgage options you could qualify for.