Looking to get a mortgage? Especially with current low interest rates, more people in London, Ontario are looking to buy their first home than ever before. We get a lot of people asking about their credit score and what their current debt load means for qualifying for a mortgage. The #1 thing that we tell people about borrowed money is that debt is not created equally. Not all debt is bad debt, and when you are looking to improve your credit score and qualify to buy a home, learning how different types of loans impact your credit score is a good place to start.
The first thing to understand is that there are two types of debt: secured and unsecured. Secured debt means that your borrowed money is backed by something tangible that the bank can repossess if you do not make your payments. A mortgage is a good example of secured debt. Unsecured debt, like credit card debt and students loans, means that the bank does not have a form of security to recover the money they loan you. It’s not like the bank will take your degree back or the clothes you bought on a shopping spree!
Once you understand the distinction between secured and unsecured debt, it’s fairly easy to see how these each type of loan will affect your credit score differently. It can sometimes be tough to get an unsecured loan if you have a bad credit score and too much unsecured debt can hurt your credit rating, which is why it’s always good advice to pay down your credit card debt or restructure your financing to lighten the load on your credit card.
Many people looking to buy a home for the first time think that they need to work to pay off all their debt, but if they have student loans, for example, as long as they are making payments on time, this type of debt can actually help their credit score because it shows a long history of good debt repayment. After all, having student loans means that you have invested in your education, making you more employable and capable of repaying back a larger loan, such as a mortgage.
If you are wondering how your current debt load affects your credit score or your ability to qualify for a mortgage, know that you are not alone! This is one of the most common questions that we are asked, and we’re always happy to take a look at your financial situation and give you advice on how to qualify for your mortgage. So give us a call and take the next step to becoming a homeowner!
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Your London, Ontario Mortgage Brokers at Dominion Lending Centres Forest City Funding FSCO# 10671