How to Get a Mortgage When You Are in Debt
If you’re like most people, you have some outstanding debts that you need to repay. If you need to get a mortgage while you are currently in debt, there may be some restrictions that apply. If you are considering selling your home in order to get some of the equity from it or want to downsize, you will need to look for another home. Find out what the restrictions are in terms of getting another mortgage while you are currently in debt.
The Lender’s Point of View
A lot of people have the misguided notion that if you have a debt you will be disqualified for a mortgage. Fortunately, this isn’t true in most cases. There will be a lot of factors that the lender considers when reviewing your mortgage application including the size of the debt. The lender will also take into account the reason you had to borrow money in the first place in order to get a complete picture of your financial circumstances.
The lender has to determine that you will be in a position where you can repay the mortgage debt if it is granted. If the lender feels that you would be able to handle the mortgage repayments along with the current repayments of your other debts, you may get approved for the home loan.
Certain Restrictions May Apply
Lenders are also very interested in seeing how you handle the responsibility of paying back a debt. They will look at the payments you have been making on your current debt to make sure that all of the repayments have been made on time and that you haven’t missed any. If you have a lot of debt right now, you may find that you will be charged a higher interest rate or in some cases you may have to come up with a larger deposit for the home.
An Affordability Check
Mortgage lenders use a special tool called an affordability check to make sure that you’ll be in a position where you can afford to make the mortgage payments. The check includes examining your income and expenses including all of your debt repayments. Some examples of debts that would be included in this check include the following:
- Credit cards
- Student loans
- Car loans
- Personal loans
- Any others
If you are planning on buying a home with someone else and both names will be on the deed, the affordability check will be done on both you and your partner. Any debt that your partner may have will also be factored into the equation. This check will help determine how much money you’ll be able to borrow.
Credit Utilization Rate
The amount of credit you are currently using is another important factor that will help determine whether you will qualify for a mortgage or not. In general, mortgage lenders want to see individuals using less than 30% of their available credit. This can vary from one lender to the next, however, but it is a good percentage to strive for. Take a look at your current debt utilization to make sure that it is currently 30% or lower than your credit limit.
If you find that your utilization percentage is higher than 30%, it would be a good idea to put off applying for a home loan for the time being. Concentrate on paying down more of the debt before submitting an application. The rules for granting a mortgage have become much more rigorous so it’s important to get your debt down as much as possible to ensure that your mortgage application is approved.