Existing Debts, Mortgage Calculators, What are Lenders Looking For?

Believe it or not, some debt can be smart and some bad credit is worse than others.  US banks and lenders base decisions regarding mortgage loans and credit on your past credit history.  No history often equals no credit, and it may be even worse than bad credit!  Mortgage lenders will certainly look at many different attributes of a loan application before granting a home loan approval or denial.  Credit histories are the single most important factor in evaluating a home loan request.  An individual’s credit history will play a significant role in the interest rate of the home loan as well. 

When a home loan applicant inputs their monthly income and monthly payments in a mortgage calculator to help determine potential loan qualifications, the mortgage calculator is not capable of evaluating the type of debt the applicant has.  Even though the mortgage calculator can’t measure the various types of debts an individual has, the mortgage lender will.  Lenders use certain information regarding debt levels, debt types and debt payments to calculate your credit score, and then determine if the credit you do have makes you a good risk for a new home loan. 

Lenders use the following types of information to determine whether you are a good risk for credit regarding the types of debt you have:

Your Credit History:  Lenders evaluate whether you pay your debts when assessing your creditworthiness.  Late payments can hurt you, whether the payment was your telephone bill or your credit card.  Lenders are looking for a reliable track record of paying your bills on time.  However, not all debts are evaluated the same.  A delinquent car loan is more important than a delinquent utility bill.  Some general rules are:

The more recent the delinquency is, the more important it is or more detrimental to the chance of being granted a home loan.

The greater the importance of the loan that the delinquency is on, the greater the impact it will have on the home loan request.  A delinquent mortgage is more noteworthy than a delinquent car loan which is more important than a delinquent credit card which is more notable than delinquent department store charge card which is higher up than a delinquent telephone bill and so on. 

How long your credit history is also matters – the longer your history, the better your chances.  A 10 year credit history is more appealing than a two year credit history.  

Current Debts:  Lenders assess the amount of current debt you have elative to available credit – the less, the better.  Ideally, your debt should make up no more than 33% of the credit you have available.  If you have 5 credit cards with credit limits of $3,000.00 each and every one of these charge cards is near the maximum credit limit, this will have a negative impact on the loan evaluation and the credit score.  If the debts are car loans or mortgages the ratio of current debt to available credit is not as important.

The Type of Credit You Carry:  Creditors prefer secured debt to unsecured debt, and old debt to new debt, when assessing you for a loan.

Debt that Appeals to Lenders:

Mortgages:  As long as you’re up to date on your payments, mortgages are usually appealing to potential lenders.  Existing or previous mortgages paid on time shows that the applicant has a track record of paying large loans and large monthly payments and this is an indication of a excellent credit risk. Real estate is generally seen as an asset that can appreciate in value, and therefore a worthwhile debt for the consumer.

Auto Loans:  Auto loans are generally considered a credit risk determinant as well.  Auto loans are usually larger monthly contractual obligations and are secured loan.  Car loan payments can be sizable which shows that an individual who can make numerous payments on time understands credit risk.  Be careful with the level of the payment though.  A large monthly payment can impact the ability to qualify based on the debt to income ration of the mortgage request.  The mortgage calculators can be sued to asses the impact on an individual’s debt auto because of a large monthly payment such as an auto loan.  It is also best to keep in mind that a car is a depreciable asset, and decreases in value as it ages.

Bank Loans:  Bank loans are good for your credit rating as long as they are repaid promptly and payments are made on time.

Credit Cards:  Credit cards are best if the amount carried is less than 33% of your limit. Otherwise, lenders become wary.  The problem with credit card debt si that it is not secured or used to buy a durable asset.  A large amount of credit card debt, even if it is paid on time, is an indication of a consumer who lives beyond their means and can not manage their own budget very well.

Debt Consolidation Loans:  These loans may be a good sign for some creditors and not so for others.  Consolidating debt should reduce the amount of credit outstanding relative to available credit on credit cards.  This can boost a lenders risk assessment.  However, the debt consolidation is also an indication that a consumer has had trouble reduces their outstanding credit on their existing income level.  The situation can be magnified if the monthly payment prior to the consolidation loan were not paid in a timely manner. 

Managing the type of debt and amount of debt can impact how a mortgage lender views an applicant.  The number one rule is maintaining a good credit history and keep the credit card balances down a slow as possible.  It isn’t necessary to cancel credit cards, just be mindful of creeping monthly balances before applying for a mortgage loan.

Employing a mortgage calculator can assist in the evaluation of a consumers current level of debt.  The mortgage calculator can guide a potential home loan applicant to evaluate their income and debts including mortgage payments, car payments and credit card obligations to see how high the debt level is and how it may be altered to a more advantageous position.

Tags: credit, home loan, mortgage calculator, mortgage payment calculator, mortgage rates

This entry was posted on Wednesday, February 11th, 2009 at 9:12 am and is filed under Mortgage Basics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.