This is a great question!
In today’s day and age, there is an idea going around that having debt is bad. That when you have it, you’re not in as good of a place financially as people who don’t have debt. What some people don’t know is that not having debt can actually be a bad thing. However, there are certain kinds of debt that help you when it comes to applying for a mortgage, but they can also work against you.
In this article I am going to discuss some of the right kinds of debt as it relates to applying for a mortgage.
So, like I said, there are certain kinds of debt that actually work in your favour. Why? The simple explanation is that when you go in to apply for a mortgage, you’re asking for a quite a bit of money. And, whoever you are borrowing from needs to know that you are going to be able to consistently pay back this loan. It’s like if you wanted to redo your kitchen, you want to see someone’s portfolio of work before you hire them. It’s similar when you apply for a mortgage. They need to see your debt payback track record.
Receiving a car loan is obviously much easier than receiving a mortgage loan. However, banks, among other places, will hand out loans to first time buyers in hopes that you will come back and apply for your mortgage through them as well. By taking out this smaller loan and successfully paying it back each month will allow lenders to see that you have the ability to manage your finances and pay back what you owe.
Primarily, a car loan gets you into a car. This vehicle will get you to and from work, transport your family, and all around help facilitate freedom as it relates to your comings and goings. However, one of the cons of a car loan is that it’s very easy to get yourself into a car that you actually can’t afford. This means you end up with a car loan that is higher than what your budget allows, which can get you into trouble. So, the key is to remove the emotion from your car purchase. Once you do that, you will realize that a car is just a car, and you will simply buy what you need.
Consistently making purchases with your credit card and then paying it off is key. Lenders like to see a $2,000 limit or more and they want to see that you can make smart purchasing decisions, by not needing balances to sit on the card for months in order to be paid off. Keeping it simple, such as purchasing your groceries with your credit card and then paying it off when it hits your account is what goes a long way.
In this day and age, credit cards are required though. Try renting a car or reserving a hotel without one. Also, they can be used to automate other payments like your car insurance, so you know you will never miss that payment. Not to mention that there are many credit cards on the market that accumulate points or even a dollar value. The con of using a credit card is that it’s easy to overspend. I think we’ve all done this at one point or another. A credit card should not be the main source of payment for your life. Having a proper cash flow plan would help resolve this problem completely.
Lines Of Credit
This is a great way to show that you can manage a larger amount of debt because lines of credit are typically larger than credit cards and can often only require monthly interest payments. This shows that you are choosing how much to pay back every month and are consistently able to manage your finances enough to make those payments.
Some of the pros of credit lines include that they are a great way to help you complete larger projects projects such as a kitchen renovation. They can also help you ride through a time of financial hardship. Lines of credit can be very important in both these roles. However, the major con when having and using lines of credit is that it’s easy to use it to payoff overspending. This is something you should avoid doing at all costs. If you’re using your line of credit to compensate for overspending then you need to have a look at your budget and potential seek out some help to create a cash flow plan.
All of these debts are essential to live a full life these days. Especially when you want to take the big step to own your own home, which requires a huge loan in the form of a mortgage.
Lenders will assess how well you have been able to handle the debts mentioned above. In fact, if you do not have any forms of debts, especially revolving debts, you are essentially not credit worthy. You have not demonstrated you have the character to consistently payoff a mortgage.
Owning a home is the easiest way for the average Canadian to increase their wealth through equity. You can use that equity and turn that into more wealth through investment or business opportunities, or more real estate. This opportunity starts with demonstrating you can handle debt. Debt is your friend, your road to opportunity, but you have to control it.