What Happens If You Have Too Much Debt
Having too much debt can have some serious consequences, which may interfere with your ability to achieve your financial goals in life. A large amount of debt can have a negative effect on your ability to secure other kinds of loans. For instance, excess credit card debt may impede getting the best terms and interest rates for a home mortgage or automobile loan. When you carry too much debt, your credit score is negatively affected. Your FICO® score, a specific brand of credit score created by the Fair Isaac Corporation, is a three-digit number between 300 and 850 based on information provided through your credit reports. It is calculated using your credit data across five different categories with various weights:
- Payment history 35%
- Length of credit history 15%
- New credit 10%
Using too much of your available credit affects the amounts owed category , and late payments affect your payment history category , which when combined account for 65% of your FICO score. A lower FICO score can translate into less competitive interest rates and less favorable loan terms offered to you by various creditors, including lending institutions, credit card issuers and insurance companies. For your reference and comparison, here are the FICO score ranges and what they mean:
|FICO Score Range|
|This score demonstrates to lenders that you are a risky borrower.|
Lower Your Debt Payments
For most people, attacking debt is the easier of the two solutions. Start off by making a list of everything you owe. The list should include credit card debts, car loans, mortgage and home-equity loans, homeowners association fees, property taxes and expenses like internet, cable and gym memberships. Add it all up.
Then look at your monthly payments. Are any of them larger than they need to be? How much interest are you paying on the credit cards, for instance? While you may be turned down for a debt consolidation loan because of a high debt-to-income ratio, you can still consolidate debt with a high DTI ratio with nonprofit debt management. With nonprofit debt management, you can consolidate your debt payments with a high debt-to-income ratio because you are not taking out a new loan. You still qualify for lower interest rates, which can lower your monthly debt payments, thus lowering your ratio.
Remember that improving your DTI ratio is based on debt payments, and not debt balances. You can lower your debt payments by finding a debt solution with lower interest rates or a longer payment schedule.Other alternatives worth considering to lower your expenses and pay off debt:
Most important, make a realistic budget designed to lower your debt and stick with it. Once a month, recalculate your debt-to-income ratio and see how fast it falls under 43%.
Will A Debt Management Plan Affect My Mortgage
When youre swamped with debt, starting a debt management plan or getting a payment holiday can seem like a reprieve.
Both these strategies may help you out in dire circumstances. However, both also impact on your credit history, and you should carefully consider the potential effects before going ahead.
Under a debt management plan, you meet a portion of your repayments each month over a set time period. Often, companies are happy to agree to an arrangement like this because it helps them recover some of the outstanding money.
However, paying less than you owe each month may be recorded as a series of defaults on your credit record which over the course of several months can enormously damage your credit rating. Even after youve completed your plan, you may have to spend more than a year repairing your credit history before being able to apply for a mortgage.
Similarly, payment holidays offered by lenders can occasionally end up being recorded as defaults on your credit history. If this happens to you, contact the lender and ask for the defaults to be removed.
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How Do Mortgage Lenders View Debt
A common belief among home buyers is that any kind of debt will ruin your chances of being approved for a home loan.
But in reality, mortgage lenders will look at a number of factors, including the type of debt you have, the circumstances around it and how it affects your overall financial health.
A key factor banks will consider is your debt-to-income ratio how much debt you have as a percentage of your income. The level of acceptable debt to income ratio will vary from lender to lender, but generally the lower your debt to income ratio, the better.
EXAMPLE: – £100 on your car loan – £200 payment on your credit card
Your monthly debts will come to £1,200. If your gross income is £3,600 per month, your debt to income ratio is 33% .
How Do You Calculate Interest On A Credit Card
To calculate your interest charges, you need to figure out what your APR is, how much your average daily balance is, and how many days are in your billing cycle. You should be able to find most of this information by logging into your account.
If youre carrying a credit card balance, youll likely be charged interest. Credit card companies may differ in the time frame they give you to pay for new purchases before they charge interest, though they typically give you about a month to do so.
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Is It Worth Getting A Mortgage With Bad Credit
If you have a low credit score and dont meet the minimum score needed for a mortgage, there are other alternatives. If an A-lender or prime lender wont approve you, you can opt for a B-lender or subprime lender. They work with people like you who dont have a good enough credit score to get a loan from the bank. If you happen to be working with a broker, they likely know a lender who can help you out.
Your broker will often be paid a finders fee by the lender. However, with a bad credit mortgage, you may have to pay extra fees if your broker refers to you. Beyond the finders fee, youll be paying other fees when you work with a subprime lender.
Normally, these fees wouldnt happen if you were working with an A-lender. Not only are you paying a higher mortgage rate, you may pay up to a 1% processing fee on the total amount of your loan. If you work with a lender found through a poor credit mortgage broker, there may be another 1% added. Putting this in perspective, this 2% will be an additional $10,000 on a $500,000 mortgage loan.
If you have bad credit and want a mortgage, youll be paying much more throughout the lifetime of the loan. If you default on payments, the lender can sell your home to get back the costs of what you owe. Yes, you may have more luck locking in a mortgage loan but in the long run, youll be paying a lot.
Is There Anything I Can Do To Boost My Mortgage Application
Offer to repay your debt in full before you buy your property
If you know you will be able to afford to pay back your debt before you buy your property, then some banks may consider this in your affordability calculations. They will often disregard this, as your promise to pay back your debt in full is no guarantee for them. However, there is a possibility they will subtract a certain amount from your total credit card debt to increase the amount you can borrow.
Close all your unused credit card accounts
The amount of credit you are using compared to the amount of credit available to you is important. You need your credit utilisation rate to be as low as possible – below 30% is ideal. Keeping multiple accounts open, even if they are not being used, increases your total credit limit across all your cards. This may negatively affect your mortgage application. Close any unused credit card accounts and keep the balances low on the ones you need to keep open.
And stay out of your overdraft!
Ensure all your repayments are made on time
Make sure you try to pay back your credit card repayments on time. This will raise your credit score and increase the likelihood of your mortgage loan being accepted. Even payments on utility bills and other outgoings are important. Consider setting up a direct debit to ensure the payments are always made on time.
Start budgeting: minimise your monthly outgoings
Increase your deposit
Struggling to work out what’s best for you?
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The Credit Card Minimum Payment
When you look at your credit card bill, you’ll see both the full balance and a minimum payment. How do these minimum payments work and what happens if you only make the minimum payments? I’m glad you asked. If you carry a balance on your credit card, your best bet would be to pay it off all at once, as quickly as possible. If you can’t pay it off all at once, it’s a good idea to pay as much as you can afford to pay.
How To Lower Your Debt
To get your DTI ratio under better control, focus on paying down debt with these four tips.
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Remove Any Old Financial Ties
If youve ever had a joint financial product with another person, this will show on your credit report. It wont affect your credit score but it can affect how lenders view you. So if youre associated with someone who has a poor credit history, it might be better to remove ties with them off your report so it doesnt reflect badly on you.
First of all, make sure the joint account has been closed. Then contact the relevant credit reference agencies to request a notice of disassociation to remove any ties from your credit report.
Can I Remortgage With Credit Card Debt
Yes – you can remortgage with credit card debt. Remortgaging is when you change your mortgage deal by paying off your current mortgage with a new one. You can stay with your present lender or move to a different one.
Whether you are applying for a mortgage or a remortgage, lenders will run affordability checks on you, using their own criteria . Again, the level of debt and the way you manage it will be reviewed. So if you can show that your level of debt is affordable and you maintain your repayments, then lenders should be more likely to view this in a positive light.
Just bear in mind that if you have a high level of credit card debt, a bad credit history, or you cant prove that you can afford remortgage repayments then your application is less likely to be accepted. This is because lenders will see you as more of a risk, with the potential for you to fall behind on mortgage repayments.
If you have enough equity within your property and you can match the lender’s affordability criteria, you may also be able to consolidate your debt as part of remortgaging. This will increase the amount you owe against your house, but may be a more affordable option for you.
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Why Are Debt Servicing Ratios Important When Applying For A Mortgage
Please share this article with your clients . It provides information about how to calculate debt to income ratios and the effect it can have on mortgage qualification. If you have questions, contact one of our expert BDMs or award winning underwriters to offer tailored solutions to your clients.
Whether youre taking on another mortgage or refinancing, how do you know if you can afford to make the new mortgage payment? Theres a ratio for thatit weighs your financial obligations against your income. No lender wants to see you get into too much debt, so they look at your debt servicing ratios to see just how much you can afford to borrow.
How To Buy A House With Bad Credit
Its not as easy for those with bad credit to buy a house but its not impossible. There are many types of mortgages: joint mortgages, mortgages with guarantor, co-signed mortgages, and more. Compare them all to see what will work for your situation. You may need to secure a high-risk mortgage if you dont qualify for mortgage from conventional. Here are a few tips on getting your first mortgage even with bad credit.
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Variable Fixed And Promotional Rates
Officially, there are 3 types of interest rates for credit cards variable, fixed and promotional. Realistically, however, there is only one. They are all variable to one degree or another.
Some credit cards may start out with fixed and promotional rates, but inevitably those rates change, effectively becoming variable.
Nonetheless, you may choose to start with either or fixed or promotional rate because it suits your goals. Here is a review of the pros and cons for all three:
If You Have Debt On Your Credit Card It’s Still Possible To Borrow Money To Purchase Your Dream Home
The average credit card debt per household was at £2,592 at the beginning of 2020.
More than 50% of households in the North East, North West, Yorkshire & the Humber, and East Midlands have financial debt.
22% of Londoners find their financial debt to be a heavy burden, notably higher than other regions.
The proportion of individuals with financial debts peaks in the 25-34 age group. 51% of people in this age group have non-property financial debts.
In older age groups the percentage of individuals with these debts falls steadily until it reaches a low of 15% for those 65 and older.
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Ask For Help About Getting A Mortgage With Credit Card Debt
Checkreviews for mortgage brokers and find out which lenders accept credit card debt.
Mortgage brokers work to find the best mortgages for the people theyre helping. They can work quickly to get you the information you need to make a decision about getting a mortgage with credit card debt and can show you the steps needed to take to buy a home sooner.
Their priority is your peace of mind and a good mortgage broker always keeps affordability at the forefront of their mind to help mitigate against the chance of the agreement becoming too expensive for the borrower.
Work History And Income
As a mortgage usually involves a large sum of money. That said, a lender looks at more than just a credit score. They want to know you have the means to pay them back so theyll be looking at your household income. When you apply for a mortgage, lenders review your employment history and financial records. If youve worked consistently on a full time basis for many years, this helps you with your mortgage application. Canada Revenue Agency can confirm your income through past notices of assessment.
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What Is A Good Debt
Every lender is different, but 36% is the generally accepted debt-to-income cutoff for prime mortgage loans. Thats the maximum debt-to-income ratio permitted under Fannie Maes rules for manually underwritten loans.
Fannie Mae does make exceptions to the 36% rule. According to Fannie Maes Eligibility Matrix, Fannie Mae permits debt-to-income ratios as high as 45% on loans made to borrowers with higher credit scores and cash reserves.
Loans made to borrowers whose debt-to-income ratios exceed 43% may lack important borrower protections, such as limits on up-front points charges and interest-only periods. Check the Consumer Financial Protection Bureaus literature on Qualified Mortgages for more details about what is and isnt permitted.
Smaller creditors are exempt from rules governing Qualified Mortgages and may therefore issue favorable mortgage loans to borrowers with debt-to-income ratios in excess of 43%. Small creditors are defined as lenders with under $2 billion in assets and 500 or fewer mortgages issued in the previous year. Bear in mind that lenders have final discretion over underwriting decisions and that, no matter how lenient your lender, youre likely to face higher interest rates and down payment requirements if your debt-to-income ratio exceeds 36%.