Your total debt can make or break your mortgage application, especially new debt. Banks consider your debt-to-income ratio when approving an application. Beyond that, if it sees a large amount of new debt on your credit report, it may see you as someone trying to get out of a bad financial situation.
Your debt-to-income ratio shows what percentage of your monthly income goes toward paying debt. The bank runs your credit report and adds up your debts. It then adds the proposed monthly payment to that figure to get your total debt. It divides this number by your income to get the ratio. If more than 40 percent of your income is allotted for your monthly debt, the bank will hesitate to approve the loan, unless other circumstances are strongly in your favor, such as if you have a high net worth or significant deposits within the bank.
If you have a lot of recent debt, odds are you have a lot of inquiries on your credit report. A large number of inquiries in a short period of time can have a negative effect on your score. While the impact is often relatively small, it varies from person to person. People with fewer accounts or less credit history are likely to be affected more. Generally, an inquiry will take less than five points off your credit score, but multiple inquiries can add up and lower your score to a point where the bank may think twice before approving your loan.
Not only do multiple inquiries lower your credit score, but racking up a large amount of new debt in a short amount of time can point to a negative trend. The bank will see these inquiries and wonder why you are taking on new debt. More often than not, it gives the impression that you are trending toward financial trouble. Statistics show that people with more than six inquiries on their credit report are eight times more likely to file for bankruptcy. A bank does not want to be in that situation, which can lead to your application being denied.
When you apply for a mortgage and you've taken on a significant amount of new debt, you won't necessarily get denied. However, you'd better be ready to explain why the debt is showing up now. This is especially the case if your debt-to-income ratio is on the edge of the bank's allowance. Submit a detailed explanation in writing along with your application. It won't help you if you don't qualify, but it might help push your application in the right direction if yours is a borderline case.
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