Key Takeaways
- Existing debt can hinder your loan serviceability or your ability to repay a loan.
- Lenders will look at your DTI ratio, credit score, and repayment history to gauge your past loan conduct.
- If you have existing debt, you should be able to demonstrate good repayment conduct with no missed or late payments.
- To increase your chances of approval despite existing debts, take steps to improve your credit score, lessen your DTI ratio, and increase your income.
When applying for a home loan, one key consideration borrowers must pay attention to is any existing debt. Having existing debt like personal or car loans doesn’t automatically disqualify you from getting a home loan, it all depends on how responsibly you manage them and your ability to service any additional lending you’re seeking. Lenders must be able to see good repayment behaviour on your part, with no missed or late payments.
Here’s how your existing debts may impact your home loan eligibility:
Impact of Existing Debts on Home Loan Eligibility
Any existing debt can lessen your loan serviceability. Loan serviceability refers to your capacity to pay back a mortgage based on the value of the home you want to purchase, your income, and your financial situation, including your existing loans and other debts.
When you apply for a home loan, lenders conduct a serviceability assessment to ensure you can afford the loan repayments on top of your existing debt obligations. High existing debt can reduce your serviceability, making it harder to get a loan approval.
Red Flags for Lenders
When you have existing debt, here are some factors that may reduce your chances of getting loan approval or may get you less favourable terms:
- Poor Repayment History: A history of late payments or defaults can negatively impact your loan application. This lessens the lender’s confidence in your capacity to service another loan on top of your existing debt obligations. Conversely, a good repayment history demonstrates financial responsibility and good conduct.
- High Debt-to-Income Ratio (DTI): Lenders assess your debt-to-income ratio to determine how much of your income goes towards servicing debt. A high DTI ratio could indicate a significant portion of your income is already committed to existing debts, which can reduce your borrowing capacity and negatively impact your loan approval chances.
- Low Credit Score: Your credit score is influenced by your existing debt and how well you manage it. Timely repayments and low credit card balances positively impact your credit score, while missed payments and high debt levels can lower it. Making many credit applications in a short period of time and frequent changes of address can also negatively impact your credit score. A good credit score increases your chances of loan approval and may also help secure better interest rates.
- High-interest Debt: Different types of debt can have varying impacts. Secured debts like car loans or existing mortgages might be viewed more favourably than other high-interest debts like credit card balances or personal loans. The stability and purpose of the debt can also be considered.
Increasing Your Chances of Home Loan Approval
If you have existing debt and want to increase your chances of mortgage approval, here are some strategies you can implement:
- Pay Down Existing Debt: Reduce your overall debt levels by paying off as much as possible before applying for a home loan. Focus on high-interest debts first, such as credit card balances or personal loans.
- Improve Your Credit Score: Ensure all your existing debt repayments are made on time. You should also regularly check your credit report for any errors or anomalies that may be lowering your score. Additionally, avoid applying for new credit in the lead-up to your home loan application, as this can have a temporary negative impact on your credit score.
- Consolidate Debt: If you have multiple high-interest debts, consider consolidating them into a single loan with a lower interest rate. This can reduce your monthly repayments and make your financial situation more manageable.
- Increase Your Income: Boost your income through additional work, a part-time job, or by generating passive income. A higher income can improve your debt-to-income ratio and increase your borrowing capacity.
- Save for a Larger Deposit: A larger deposit reduces the loan-to-value ratio (LVR), which makes you a less risky borrower in the eyes of lenders. Aim for a deposit of at least 20% to avoid lender’s mortgage insurance (LMI) and improve your chances of approval.
- Reduce Living Expenses: Lower your monthly living expenses to improve your serviceability assessment.
- Choose the Right Lender: Different lenders have varying criteria for loan approval. Research and choose a lender that suits your circumstances the best.
- Work with a Mortgage Broker: An expert mortgage broker like Dark Horse Financial can help you understand your financial position and recommend lenders that are more likely to approve your loan based on your specific circumstances. They can also assist with the application process and negotiate better terms on your behalf.
By implementing these strategies, you can strengthen your financial position and improve your chances of securing a home loan, even with existing debt.
Find Out Your Home Loan Eligibility
If you have existing debt, you may wonder if you’re eligible for a new home loan. Consult with us to learn more about your profile as a borrower and the best loan terms available to you.
