How Lenders Evaluate Debt

Dated: 07/07/2016

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How Lenders Evaluate Your Debt


If you're considering buying a home, you're likely taking a hard look at your financial history. While it's very important when applying for a home loan to get your credit and debt in its best possible shape, also remember not all debt is the same. Lenders look at all the money you've borrowed previously, but not all of these will be evaluated the same way.

Here are some key points to know about how

lenders evaluate the two most common types of loans you likely have on your credit report: credit cards and student loans.
Credit cards
Most people have some credit card debt. In fact, having a credit card and using it responsibly can be a good way to build credit. If you're staying up-to-date on your card payments and are at the lower end of your credit limit, this can actually help improve your credit score and make you more attractive to lenders.
However, as Bankrate noted, one thing to look out for is having too many credit lines . Credit card companies will run credit inquiries, which may damage your credit score if they occur too often. Lenders may also wonder why you need so many credit cards. Even if you aren't using all the credit lines, applying for these cards may make it seem as if you're not financially stable. Try to limit yourself to one credit card, keep your spending low and make regular payments.
Student loans
As you're probably aware, mortgage lenders evaluate your debt-to-income ratio when determining your eligibility for a loan. This worries many potential home owners because they often had to borrow significant amounts of money to pay for their education, especially if they pursued advanced degrees.
However, as Zillow found in a market survey, student loan debt has only a minor effect on the average American's likelihood to own a home. On the other hand, the level of education the homeowner received was a more significant factor. For example, someone with a doctorate degree is 80 percent more likely to own a home whether he or she has $50,000 in student loan debt or no debt at all.
The reason, Zillow discovered, is that people with four-year or advanced degrees are more likely to earn higher salaries and move up quickly in their organizations, which makes them more attractive to lenders. Even if the applicant is still earning an entry-level wage, many lenders recognize this will likely change in a few years, especially if the applicant has a graduate or post-graduate degree.
Spending money on your education is an investment for your future, and most lenders see it that way too. However, as with credit card debt, you do need to be responsible in how you manage your student loans. Lenders will want to see that you are making your regular payments and are in good standing. Additionally, you must have completed the degree for which you borrowed funds.

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