Personal loans can have either a positive or negative effect on mortgage applications, depending on the situation. If you’re planning to purchase a home in the coming future, you might want to reconsider before getting a personal loan.
Paying for an existing loan as you apply for a mortgage can affect your application in different ways. For instance, it can reduce how much you can borrow, how good your credit score is, and how well a lender will favor you based on how you manage the debt.
So, before you head on to apply for a personal loan, this article will cover what you need to know.
How a Personal Loan Affects Your Application
Any loan or debt listed on your credit reports can affect your ability to get a mortgage loan. There are usually two things lenders check about potential borrowers applying for a personal loan: how you’ve managed the debt and how it has affected your debt-to-income ratio.
1. Debt Management
As with any debt or loan taken, making payments on time is crucial, especially if you plan on applying for any other loans in the future.
With a mortgage, it’s a long-term commitment for both you and the lender, so missing any payments on your past or current loans, such as a personal loan, isn’t a good sign for them. They’ll less likely approve your application or simply give you a higher interest rate.
Meanwhile, managing to pay your monthly payments on time will make lenders look upon you favorably. To them, it shows you can commit to your financial responsibilities, and they’ll likely qualify you for a mortgage. Moreover, on-time payments also improve your credit score over time, which is another thing lenders consider.
2. Debt-to-Income Ratio
While you determine how much you want to borrow, mortgage lenders will check your back-end debt-to-income ratio, which refers to your total monthly debt payments divided by your monthly gross income.
Your front-end debt-to-income ratio refers to how much of your gross income is allocated toward housing costs. If you have a low back-end debt-to-income ratio, it doesn’t make a difference even when you have monthly payments for a personal loan.
However, most lenders prefer a back-end debt-to-income ratio of 36 percent or less. If yours is higher than that, your application may not get approved, or you won’t qualify for the amount you want to borrow.
Applying for a Mortgage While Paying Off a Personal Loan
If you’ve already taken out a personal loan but want to apply for a mortgage, the best thing to do is make monthly payments on time to increase your chances of getting approved.
If you’re already close to the end of your loan term, you can pay off the remaining amount before applying for the mortgage. When you eliminate your existing debt, you improve your chance of getting the amount you want to borrow. However, if you don’t have the money to do that, you can simply focus on maintaining a good payment history.
Applying for a mortgage while still paying off your personal loan might not be the best idea. Look for ways to improve your chances of getting approved, such as improving your credit score and debt management. If not, you can also look for other loan options.
At Mid-Town Loans, we make life a little easier with installment loans in Decherd, TN. We understand the time-sensitive need for help when short on funds, which is why we try to make the borrowing process quick and easy. If you want to apply for ,small personal loans, get in touch with us today!