It seems odd to think that a lender would be cautious to give out a loan to someone who had a paid off their mortgage. A lower debt burden should mean less risk, right?
Unfortunately, this isn’t always the case. Paying off your mortgage is great in the sense that you no longer have to worry about making payments or getting behind, risking foreclosure. On the other hand, it can be bad because you won’t have a large secured loan currently active on your credit report, which many lenders use to determine your overall risk level as a borrower.
Getting Credit Without A Mortgage
Although getting a good credit line after your mortgage is paid off can be tricky, it isn’t impossible. One of the most important things to do after your mortgage is paid in full is to obtain a letter from your lender that documents your payment history. You want to be able to show your future lender that you maintained a timely payment schedule when your loan was active.
Lenders view those without active mortgages as risky because there is less information to judge them on, which is why the more information you can provide, the better your chances at a potential loan. Because your debt to income ratio is much lower when your mortgage is paid off it is helpful to provide more information about your income to the lender, this will demonstrate your ability to maintain the new loan payments. This may include your paycheck information and information about how much you have in the bank. Lenders want to be sure that your income is sufficient to make the payments, rather than risk having a debt go unpaid or end up eliminated through bankruptcy in the future.