According to a recent survey done by NerdWallet, the average amount of consumer debt carried by American households is rising. The average amount of consumer debt that the American household has is over $16,000, almost as high as its peak in 2008. Overall, the amount of total debt carried by American households is over $132,000 up from $88,000 in 2002. However, as the debt amounts continue to rise, incomes have not kept up with these increases. This means the average household is more indebted potentially impacting their ability to get approved for mortgage loans.
Is All Debt Bad?
Usually when people think about debt, it’s with a negative connotation. No one likes making debt payments and even worse, paying interest, but carrying some debt is somewhat of a necessary evil.
Here are some of the benefits of carrying debt:
- Your open tradelines will establish a FICO score.
- A manageable amount of debt on your credit report establishes a payment history.
- Mortgage underwriters can examine your payment history and see your ability to manage money and pay your bills on time.
So while you don’t want to have an excessive amount of debt, having some established credit lines will help you maintain a strong FICO and show your credit history.
Are All Debts Equal?
There are many different types of debt that borrowers may have. Consumer debt includes credit cards and unsecured personal loans. Borrowers may also have student loans or secured auto loans. Typically, underwriters are more concerned about the overuse of unsecured consumer debt. They look to see how much-unsecured debt a borrower has in relation to their annual salary. Also, they are looking at how much utilization of the credit line in comparison to what is available. They typically want to see that charges are no more than 50% of the credit line.
Installment loans show underwriters how large of payments you’ve been able to handle. They show your responsibility in handling consistently big sums each month in comparison to a small minimum payment.
Other Ways Consumer Debt Impacts Your Mortgage Application:
- Debt affects your FICO score. Your utilization ratio, payment history, and types of trade lines opened all impact your credit score.
- It contributes to your debt to income ratio. The amount of debt payments you are obligated to pay each month are added in addition to your new mortgage payment to calculate your debt to income ratio. If your debt to income ratio is too high your loan application can be denied.
In short, having debt is a common occurrence in our society. Besides, maintaining a manageable amount of debt will allow you to establish a strong credit history and help your mortgage application. An excessive amount of debt can eliminate your chances of approval for a mortgage. Find the balance between establishing credit and charging too much debt.