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How Does Different Debt Affect Your Approval?

Did you know that some types of debt have a greater impact on your chances of mortgage approval than others? 


Although lenders appreciate seeing a variety of credit accounts in your history, they evaluate different kinds of debt differently. Some debts might be a red flag, potentially complicating your loan approval process, while others may demonstrate responsible credit management. 


Here's an in-depth exploration of how various types of debt can influence your mortgage application and what you can do to improve your financial profile in the eyes of lenders.


Credit Card Debt 

Credit card debt is categorized as revolving credit, which means the balance you owe can fluctuate each month. When evaluating your mortgage application, lenders pay close attention to your credit utilization ratio—the proportion of your available credit limit that you are actually using. A high utilization ratio can adversely impact your credit score, a critical factor in securing mortgage approval. 


Lenders generally favour a credit utilization ratio below 30%. If your ratio exceeds this threshold, it could indicate a heavy dependence on credit, potentially raising concerns for lenders.


Student Loans 

Student loans fall under the category of installment loans, characterized by their set repayment schedule. Possessing student loans does not automatically prevent you from qualifying for a mortgage, however, the regular monthly payments on these loans reduce your available income and affect your debt service ratios—key metrics lenders evaluate to determine your capacity to take on more debt. 


If your monthly payments toward student loans are substantial, they could restrict the amount you are eligible to borrow for a mortgage.


Car Loans 

Like student loans, car loans are also a type of installment debt. The monthly installments you pay towards a car loan contribute to your overall monthly debt obligations. If these payments, along with other debts, take up a large chunk of your income, lenders may worry about your capacity to handle the extra burden of mortgage payments each month. 

It's essential to keep your total debt servicing ratio within the limits that lenders find acceptable.


Lines of Credit 

Lines of credit, whether unsecured personal ones or those secured against your home, provide flexible borrowing and repayment options. However, they can also influence your mortgage application. 


Using a substantial part of your available line of credit may signal financial strain, which may be a red flag for lenders who view this as poor financial management. Make sure that your lines of credit are not going into overdraft to stay in their good books!

 

So What Can I Do To Increase My Approval Rate?

Before you apply for a mortgage, it's important to decrease your overall debt burden. Focus on paying off high-interest debts, particularly credit card balances, and strive to maintain a low credit utilization rate. Additionally, you might consider consolidating debts that have high monthly payments into options with lower interest rates, if feasible.


Understand Your Debt and Mortgage Approval with Arise Mortgage

No matter what types of debt you have, our team can assist you in organizing it and devising the optimal strategy to help you get approved. 


Get in touch with our team today, to see how we can make your dream of homeownership, a reality.

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