4 Types Of Debt That Affect Your Home Loan
Debt affects your credit score. Your existing debt can also make or break your home loan approval. The number of debts in your Credit Investigation Bureau of India Limited (CIBIL) report influences your likelihood of getting a home loan.
There are two types of debt-secured and unsecured. Secured debt is secured by collateral, while this is not true of unsecured debt. Greater your unsecured debt, greater the risk of lending to you.
If you borrow money to purchase a house, the bank can seize the house to recover the money if you default on repaying the loan. But what if you default on repaying an unsecured liability? How will the lender recover loss of an unsecured debt?
MakaanIQ lists four types of debt that can affect your home loan.
Auto loans are secured debt. If you default on repaying your auto loan, the lender can repossess the car/asset. Through an auto loan, you are borrowing money for a depreciating asset. In an auto loan, you pay the price of the vehicle and the interest on it. As it is in the case of a home loan, you have to make a down payment of 20 per cent or more.
Repaying auto loans on time will influence your credit score positively and vice-versa.
When you apply for a home loan, the credit officer calculates a ratio called the debt-to-income ratio. The debt-to-income ratio represents how much of your income you spend on monthly debt payments. If your auto loan pushes your debt-to-income ratio too high, the mortgage lender may reject your home loan application.
You must have sufficient appetite for new debt.
Consumer loans are unsecured debt. Consumer loans do not include mortgage loans used to buy homes. A consumer loan is given to customers for household purposes, or to buy consumable items.
A consumer loan is given solely based on your repayment capacity, and for a short duration/tenure.
What many borrowers do not know is the fact that consumer loans do reflect in the CIBIL report. So, you cannot escape consumer loans while applying for a new line of credit, even if the amount is as low as Rs 25,000.
Consumer loans are also known as durable finance. Consumer loans are usually taken to buy LED TVs, ACs, Laptops, Mobile phones, Washing machines, Refrigerators etc. on easy Equated Monthly Instalments (EMIs).
Bajaj Finserv is the leading player in the consumer loan segment.
An education loan is a money one borrows to finance education or related expenses. It is probable that education/student loans will be offered at lower interest rates if the university/college is reputed. These loans do not have to be paid back until the end of a grace period (which is called Moratorium), which usually begins after the completion of your education, and when you start earning.
At times, lenders do ask for collateral while extending student/ education loans.
Banks/Financial institutions calculate a Fixed-Obligation-to-Income Ratio (FOIR) while assessing the eligibility for a home loan. While calculating the FOIR, all the running/existing obligations are excluded along with the income required for self-sustenance and dependents. Greater the number of existing loans, lower will be your home loan eligibility. The chances of your home loan application being rejected are high if your appetite for new debt is weak (keeping your survival and that of your dependents in mind).
Running Home Loans/ Mortgages
Home loans/Mortgages are perfect examples of secured debt. The repayment record of your running home loans/mortgages helps lenders assess your credibility as a borrower. In the loan market, there is a scheme for transferring home loans called “surrogate loans”. In surrogate loans, the funding and transfer of mortgage are done solely based on the repayment record of the existing loans.
If you make home loan and mortgage payments on time, this will strengthen your credit score.
Lenders will always insist on knowing the purpose of a second mortgage. They will also make sure that you are capable of repaying both the loans. The property for a second mortgage will be counted as Commercial Real Estate (CRE) if it is for a non-residential purpose.