It’s a common mistake anyone could make.
A mortgage is a huge financial obligation. And it will almost certainly be the largest loan you take out in your life.
When you are ready buy a houseYou should make sure that you can qualify for a loan at the best possible interest rate.
Unfortunately, many people unknowingly make a financial mistake that could cost them a home loan chance – or cause them to pay a higher interest rate than necessary. This mistake? Take on new debt.
Taking on new debt can affect your ability to obtain a mortgage
It is a big mistake to take on new debt before applying for a mortgage.
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See, lenders take into account a number of Factors When Considering Your Loan Application. They look at you Credit scoreand they take into account your debt in relation to your income. Both of these could be affected if you made a new financial commitment shortly before applying for a loan.
As you take on new debt, it affects the average age of your credit. This is a key component that will affect your credit score. As you shorten the average opening time of your accounts, your score can suffer. This is because lenders prefer to see that you have been responsible for borrowing over a long period of time.
Taking on new debt also means a tough credit check goes on your credit history. Too many inquiries suggest that as you take on financial obligations, you may become careless and potentially bite off more than you can chew. Your credit score could suffer. In addition, a new debt could worry a prospective mortgage lender that you can make these new payments in addition to a new mortgage payment.
Your new loan payment will affect yours as well Debt-Income RatioThis is determined by dividing your total monthly debt payments by your gross monthly income. This relationship could result in or nullify the approval of a mortgage loan.
Many lenders want your debt to income ratio to be around 36%, including your new home loan payments. If you took out a loan shortly before receiving a mortgage and have a new monthly payment to make, your rate will increase and you may be denied credit.
The last thing you want is your home ownership dreams derailed because you applied for a car loan, a Credit cardor a personal loan to buy furniture just before you got a mortgage.
To make sure this doesn’t happen, try to postpone all other borrowings until after this You have closed your home loan. That said, you don’t want to borrow a year or anything before you buy a home. And you definitely don’t want to make new commitments after you’ve pre-approved a mortgage but before you close.
It may seem like a chore avoiding other loans when you feel you need them. But you will likely pay your mortgage for decades. So it pays a little to make sure you are getting the best loan possible at the most competitive interest rate.