When a borrower applies for a mortgage, the lender looks at both secured and unsecured lines of credit. With secured credit, they are taking less of a gamble – they can seize the asset associated with the credit. Mortgages and auto loans are both secured, while debt such as credit card loans and student loans are not.
Here are four types of consumer debt that will affect a borrower’s mortgage worthiness:
- Other mortgages. As long as these other mortgages have been paid on time, lenders are generally not too worried about them. Those looking to take out a second mortgage will have their debt-to-income ratio closely scrutinized to ensure they can pay for both loans. Since these are secured loans, lenders do know they can seize the property in lieu of payments.
- Auto loans. Because these are also secured, lenders know they have collateral for non-paying borrowers. Auto loans are typically more difficult to secure than credit cards, which tells lenders that the borrower has enough credit that other financial institutions are willing to give them a loan.
- Student loans. Even though they are unsecured, lenders are not typically concerned about student loan debt because borrowers have years to pay on them. They do, however, count towards a borrower’s debt-to-income ratio, which can hurt their chances of obtaining a mortgage.
- Payday loans. While most lenders would consider payday loans unfavorable, the good news is that they generally do not appear on a credit report. However, missed payments or defaulting on a payday loan does.