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It is always good to be a good planner..!!
Being a home buyer, it is mandatory to be concerned about the unsecured or secured debts as it can affect and reduces the ability to qualify for the loan buying process. Low credit score and increased Debt – to – Income (DTI also known as Debt Equity Ratio) ratio plays a major role. It is the percentage of the monthly income that goes towards the debts. Lenders these days find it harder to lend an individual if they find him burdened with heavy debts. Even if the loan is approved, it ends up with high paid interests due to the higher risk associated.
Both credit score & DTI is used by the loan lenders to measure the potential risk carried by the borrower. With the loan application, the lender starts reviewing all the financial aspects and the personal details of the client. Higher the score, higher are the benefits of getting a mortgage that includes higher savings in future and with the low score the loan can be less affordable in long run. It is always important to keep the ‘liabilities’ in mind where the monthly installments have to be paid regularly. Lenders basically calculate the average of applicant’s income of last 2 yrs. If there is already a loan such as an education loan, personal loan, business loan or a car loan, these monthly payments also have a great impact on the mortgage application amount. The lender will add the monthly payments or the commitments to the applied amount to decide the loan amount or to take the process on the next level.
Being a new buyer to a mortgage loan who never had any credit history or a loan can also be a trouble. The lender will be over precautions while giving a first loan to an individual who never had any loan in the past as the lender will not be able to predict the behavior. In such situation, it’s a good idea to build a good credit history. In order to design a credit rating, consumer loan can be a good option. Other perspectives to be looked by the lender are the Banking habits, consistency of the business – either growing or not, debtors or creditors of the business, value of the property. If it is a first loan then the Loan to the value of Collateral (LTV) can be restricted to a certain percentage. High Net Worth or the substantial deposits within the bank can be favorable circumstances to increase the credibility.
As we all know individuals have Different Needs for which they need Different Loans so as Different Strategies Different Terms & Conditions are with the lenders. But to understand the impacts of unsecured loan on the mortgage application more closely certain points have to keep in mind.
Unsecured loan are available for a short tenure of 1 to 4 years whereas mortgage loan has tenure of 1 to 15 years. For an unsecured loan an individual have to pay higher rate of interest as compared to mortgage that varies between 12% to 23% and 9% to 10.5% respectively. The process has to be understood and a necessary precaution has to be taken during the application period. Lender wants to see that the money that you owe and Mortgage lending, if everything is positive, becomes easier and Income to Obligation Ratio decreases. High debt ratios lead to higher chances of delinquencies (default payments) and defaults (stop payments) down the line.
It’s not a bad thing to have other debts before applying a mortgage but have to be careful as over borrowing can hurt. Future late payments or defaults can have negative impacts on your future debts. It can be a good idea to call off the unused accounts as active and inactive accounts are counted differently on the scoring charts.