Are These Loans Affecting Your Credit Score?
If you are preparing to buy a new Sugar Land home then you already understand how important your credit score is to the process. When it comes to receiving approval, lenders want to see high scores, as the higher the number, the less of a risk you are.
That being said, most potential Sugar Land homebuyers already have loans outstanding when it comes time to buy a home.
So can your debt impact your credit score and your chances of being approved for a mortgage?
Secured and Unsecured Loans
Loans fall into two classifications: secured and unsecured. As the name implies, secured loans provide the lender with some security if you default. Home and car loans are examples of a secured loan. If you stop paying, the lender is able assume ownership and not be completely exposed.
This situation can mitigate risk and thus put the lender at ease in case issues with repayment come up.
Unsecured loans, on the other hand, do not provide the lender with any collateral. So if you stop paying, there is nothing for the lender to reclaim.
Before you apply for your mortgage loan, take inventory of the debt you currently have. It will be worthwhile to understand how this debt will influence your credit score and your overall mortgage application process.
Common loans – and their impact – are:
Car Loans
As mentioned above, a car loan is a secured loan. In some cases, having a car loan can actually help boost your credit score. Car loans are not as easy to be approved for, so if you have one and pay on time you are not only diversifying your credit score, but you are showing that you are responsible.
Student Loans
Despite being unsecured loans, student loans should not have an overly negative impact on your mortgage application. As long as you have a track record of making on-time payments, the one spot student loans will hit is in your debt-to-income ration.
Payday Loans
Payday loans should be avoided whenever possible. Even though they will not necessarily show up on your credit report, they loans can bury you with their high interest rates.
Current Mortgage Loans
When it comes to a secured loan, mortgages rank towards the top for lenders. The reason being that should you not be able to make your payments, the lender is able to come in and take ownership of your home.
If you already have a mortgage and you consistently make your payments on time, this loan can be a benefit to your credit score. But if you have missed a couple of payments or are always behind schedule in making them, you could face an uphill battle in getting approved by a new lender.
Lenders will always look carefully at your situation to assess whether or not you can handle an additional mortgage. If you think you can simply put your current Sugar Land house up for rent and have it cover your costs keep in mind that lenders want to see at least two years worth of tenant rent checks. You must prove that you will be able to cover both mortgages at once.
The bottom line is not all debt negatively impacts your credit score. Lenders like to see that you have both been approved for a variety of credit and that you have been responsible in using it. No matter what the loan is, make sure you pay on time and maintain a favorable debt-to-income ratio.