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If you think you’re ready to take on the responsibility of becoming a homeowner, there are certain things you should know when filling out your home loan application (How different loans affect your mortgage worthiness). Here are six factors that can affect your ability to own your own home.

Credit is given to consumers in two forms: secured and unsecured. If you are unable to pay your home loan debt, the bank can take back the house to recoup their money. This means that the debt is secured — it’s being balanced against something that you want to keep, and gives the bank some assurance that they’re going to be able to recover the money they have loaned to you.

Unsecured debt, on the other hand, means the bank can’t reclaim the thing you’re buying with the borrowed money.

  1. Student loans

Credit card debt is unsecured, and so are student loans which are not necessarily bad for your credit score if you pay them on time. In fact, student loans can actually help your score because loans paid consistently over a long period of time raise your score. Student loans will figure into your overall debt-to-income ratio, though, so they might affect your ability to afford a home loan.

  1. Vehicle finance is a secured debt, because the lender can repossess the car if you can’t make your payments. These loans can, in some cases, raise your credit score by diversifying the types of debt you carry and because you have already been approved for a loan.
  1. Cash loans like those supplied by by the cash loans provider Wonga are unsecured — the lender doesn’t have any collateral.

Although cash loans do not usually show up on your credit report, they can adversely affect your ability to get future credit if you default on the loan.

  1. An existing home loan

Home loans, when paid on time, are particularly good for your credit score, but missed payments on previous home loans will give your new lender cause for concern. If you already have a home loan and are applying for a second loan, the new lender will want to know that you can afford to make both repayments every month.

Keep in mind that if your second home loan is for a rental property, most lenders won’t count rental income until you’ve been a landlord for two years. Until that time, you have to qualify for home loans using documented income from other sources.

Having different types of debt can boost your credit score, but be aware that over-borrowing will have a negative impact on your finances in the long run. Most home loan institutions, in addition to looking at your overall credit score, will look for a debt-to-income ratio below 43%. This means studying all the money you owe, and the monthly payments on all of that debt, to determine if your income is enough to cover all your debts, including the home loan you are applying for.
Without a good credit score, you will not qualify for a conventional mortgage, leaving you with only sub-prime options which are costly with higher interest rates (Factors can negatively affect your mortgage application). Knowing your score before you apply allows you time to fix any problems on your report. If your score is low, a few months can make all of the difference. Be sure to pay down credit card balances (which account for about 30% of your credit score) before applying for your mortgage. You want to have low debt-to-limit ratios. Always pay on time. Be sure not to open any new credit. This will negatively affect your loan application.

  1. Employment

A strong employment history demonstrates stability and that you have the means to repay the home loan. Most lenders want to see that you have been with the same employer for two years or longer. Once you have applied for the loan, you may not change jobs before granted the loan. If you lose your job or take a new job, your loan will likely be denied. At closing, you will be asked for proof of employment.

  1. The down payment

The discipline needed to save a large down payment for your new home, shows that you are a lesser risk to the lender. It also gives instant equity to the home. If you have good credit, you can get by with a smaller down payment. If your credit is poor, you will have to put more money down to secure the loan. Some borrowers who have poor credit choose to use a hard money lender. Hard money mortgages require as much as 35% down payment. These are not commonly used, but the possible high interest rate on them shows the importance of good credit if you don't have the necessary funds for a down payment.

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