If you find yourself in a position needing to downsize your home, or even sell to release some equity you need to consider what is next for your housing situation. You will either need to rent, or like most get back on the property ladder. If you find yourself in debt however understanding the restrictions that may be placed upon you are very important. In our latest article Norwich Home Buyers takes a look at getting another mortgage whilst in debt.
Can I Get A Mortgage With Debt?
The short answer to this question is yes, it is possible to get a mortgage even with debt. It is understandable that sometimes life itself throws challenges at you which may involve running up credit cards and getting into debt. What is key is to make sure that you are paying them down, not missing payments and also approaching the right lenders. It is possible to get a mortgage with debt but you may find that you need a bigger deposit or may have to pay a higher interest rate.
How Do Lender View Debt?
The common belief amongst many is that any sort of debt will ruin your chances of getting a mortgage. This is not true for a variety of reasons. What is a big factor is how much debt you have, and also how repayments could affect any other payments you would make towards your home. Most lenders will look at what debt you have and the reasons surrounding it to gain a fuller picture on why you have accumulated what you have. It is at that point where they will decide if they are in a position to offer you a mortgage.
How Much Mortgage Can I Borrow If I Have Debt?
Before you find yourself approved for a loan, mortgage lenders will run what they call an affordability check. This is to make sure with your outgoings and income that you are in a position to afford to meet your payments. As part of the assessment lenders will look at the level of debt repayments including credit cards, car loans and also any student loans.
If you find yourself in a position where you are buying a home with a partner then the affordability check is taken out against the pair of you. This will therefore mean any debt your partner is carrying is also taken into account. Ensure that you both have your finances in check beforehand.
The short answer to the question of how much can you borrow is that it will be solely dependent on your affordability which will include your income and outgoings.
Does The Amount Of Credit I Use Matter To Mortgage Lenders?
When making a mortgage application the bank will not only take into account the amount of credit in which you have, but also the amount in which you are using. This is known as a credit utilisation rate and is calculated by dividing what your current debt may be by what available credit limits you have. This is why there is an emphasis on making sure that you pay down your debts before applying.
The general rule is to keep your debt utilisation below 30%. This means ensuring that you are using less than 30% of your available credit. This however may not be possible and with some lenders this may vary. On the other hand, many people who have paid their debts think that keeping accounts open is a good thing. This is true, but can also affect your utilisation rate as it is another piece of credit added into the pot.
What Should I Do Before Applying?
Before applying for a new mortgage there are a few things that you need to look at doing. With the application process becoming more rigorous, these things could really help you to secure what you require. These include:-
- Closing unused credit card and loan accounts
- Pay down debts as far as you can
- Build up credit history
- Use a specialist lender (be aware of a higher interest rate however)
- Be honest about any loans that you have outstanding
Getting a mortgage whilst in debt is not an easy feat, but it will be all dependent on the amount of debt in which you find yourself in. There are many lenders out there who will be able to help you, but ensure that you have your finances in order first. If you are in the process of looking for a new home, and would like some advice on the local market then please feel free to contact Norwich Home Buyers.