As a Realtor, and the wife of a mortgage broker, Sophia understands the world of Real Estate from various angles, including how lending works. She is also from a generation that has learned to live with a lot of debt, some of which is “good” but mostly it’s “bad”.
Credit-building debt (or “good” debt) is that which you can use to prove your dependability, responsibility, and financial stability to lenders. This would include regularly paid phone, utility, and credit card bills or loan payments. Harmful debt (or “bad” debt) can quickly bring down this kind of hard work, by pushing your limits and overspending without having enough income to tell a lender that you will be more than likely to pay them back in a timely manner.
In simpler terms, having good debt shows another entity that they can trust you with their money. They can confidently let you borrow funds, and know they will get it back with little hassle. Having bad debt habits, makes everything harder and riskier. After all, would you lend money to someone that can’t really show you they’ll for sure pay you back? Didn’t think so.
Now, we’ve explained a little about this already in our earlier post about credit scores. This time, we want to elaborate on why “bad” debt prevents folks from successfully purchasing property:
1. Car loans.
This is at the top of our list, and it does have the most serious consequences. Our agents see so many people paying $1200+ a month in car loans! This type of payment could actually cost you a few hundred thousand when it comes to getting a mortgage approval. Our best advice is to buy real estate before you take on a car purchase (with loan).
2. Student loans.
Getting your education is, of course, hugely significant and important. That said, be very wary as your repayment gets included into your debt ratio. So, as always with loans, focus first on overpaying whenever you can instead of just the minimum amount. Paying down the principal will save you a lot of interest fees over time!
3. Not saving for a down payment.
General living costs, especially here in Victoria, British Columbia, are getting more and more expensive. The modern world comes with a growing price tag too. Sound obvious, but it’s worth acknowledging, because if your goal is to own a home then it will never be more important than it is right now to choose adding to your savings account over buying the newest airpods or going out for lunch every day, etc. There’s no way to sugar coat this one: either you save your pennies, or you pinch them in a rental forever.
4. Maxed out credit cards.
This is a double whammy no-no. Not only does this massively hurt your credit score, it will most certainly affect your pre-approval application. For a deeper dive into credit, and how to manage it, read our recent post all about the subject.
Moving forward towards your goals will feel less stressful and far more achievable if you heed our warnings and begin implementing baby steps toward changing bad money habits into good ones. There are great tutorials and podcasts out there, but even better is first hand advice from our in-house mortgage broker. Reach out today to start getting closer to your dream home!