How does an unsecured line of credit effect a new loan.

Question

Re the DTI or any other metric lenders typically use.

For instance:

-- Loan applicant A has an unused unsecured line of credit for (example) $10,000.

-- Loan applicant B has an unsecured line of credit also for $10,000, but owes $10,000 on it.

Applicant B seems obvious, but what about applicant A (???)

Does the portion that is unused make the potential borrower look better due to being able to touch cash when needed), or worse to the lender?

I've never seen it classed as a cash equivalent?

(Note: I am not looking for an unsecured loan, I am just curious about it's effect on the lending decision.)

Tom S. · Answer

@Scott Mac if I'm reading your post correctly, how does an unused line of credit impact the borrowers credit? If it's unused I would see it as better, as the borrower has access to credit just in case.

I personally have access to about $100k in credit lines, all mostly unused, which in turns helps my credit score. I just did a house purchase earlier this year, along with a rental property refinance at the same time, and the unused credit didn't come up at all. I recall one balance was $1,000 and the min payment was $30 or so, so that was listed as an obligation on my mortgage application.

As noted above, unsecured credit cannot be used for a downpayment, but I believe your question is more around credit and how good or bad the borrower would look.

Jay Hurst · Answer

@Scott Mac On the cast majority of loan programs you cannot use UNSECURED credit for down payment or required reserves. So, it would not be considered a cash equivalent. But, if you do not have a payment attached because no funds have been advanced then there would not be any effect to your debt to income in applicant A situation above.

In the case of B, the payment would be considered in the debt to income ratio. and IF the funds were already seasoned meaning the funds were already in the bank account before the bank statements that are required for the particular program then those funds would more or less just be considered cash at that point.

How does an unsecured line of credit effect a new loan.

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