How Do Personal Loans Affect Getting a Mortgage Loan?
If you’re planning to buy a home within the next few years, it’s time to take a look at the rest of your finances and determine which factors could affect your chances of being approved for a loan and getting the best terms. Personal loans affect your credit, thus affecting your full financial picture. There are a few different factors that will determine how much of an impact a personal loan can have when you’re applying for a .
How Personal Loans Work
A is a form of credit that allows borrowers to access the full loan amount upfront, and the borrow makes regular payments over a set repayment term. Personal loans are different from most other loan types in that they are unsecured loans, so there is no collateral. Borrowers can typically use personal loan funds for anything they need. Since there is no collateral involved with personal loans, they typically come with higher interest rates than secured loans (such as a mortgage or auto loan). Due to this higher interest rate, a personal loan is not always the right choice if you’re planning on taking out a loan for a large purchase in the near future.
How a Personal Loan Affects Your Finances
Any existing loans or credit accounts you have are listed on your credit report, and will be reviewed when you apply for a new loan. The main factors that lenders consider in regards to personal loans are how well you’ve managed the loan and how it affects your debt-to-income ratio.
Making consistent on-time payments each month is imperative with any type of debt you have, especially if you’re preparing to apply for a mortgage loan. A mortgage is a big, long-term commitment for both you and the financial institution that approves you for the loan. Lenders will look at your payment history to see how well you’ve managed the loans you already have. Any missed payments on your personal loan can result in a higher interest rate on your mortgage loan, or damage your chances at getting approved at all. On the other hand, if you consistently pay your bills on time, this can improve your credit standing over time thus improving your chances at being approved for a mortgage loan.
Lenders will also look at your debt-to-income ratio to determine how much you are qualified to borrow. This ratio measures how much of your monthly income goes to paying your other debts each month. Lenders typically prefer that no more than 30-35% of your income is used to pay debts. If your personal loan payment carries your ratio over that threshold, you may not qualify for as much as you want or need for a mortgage loan.
How to Better Your Chances of Getting Approved for a Mortgage
Having a personal loan likely won’t make or break your chances of getting approved for a mortgage loan. If you’re concerned and want to increase your chances, there are several things you can do. Start by checking your credit score and reviewing your credit reports to make sure there is nothing you need to address before applying for a new loan. You are entitled to one free credit report every year from . If you notice any errors, have them corrected immediately. If you realize your credit isn’t where it should be, waiting until you improve your credit can save you thousands of dollars over the life of the loan. You should also avoid taking on any new credit before applying for a mortgage loan, as any changes to your debt-to-income ratio can impact your chances at getting approved for the loan and receiving a reasonable interest rate. If you aren’t applying for a mortgage loan right away, work as much as you can on paying down your existing debts so you can reduce your ratio.
If you have an existing personal loan and are considering applying for a mortgage loan, the best thing you can do is to uphold a consistent payment history by continuing to pay on time each month. If you’re close to the end of the loan term and can afford to pay off the remaining amount before applying for a mortgage, eliminating your personal loan debt could improve your chances of getting the loan. If you’re not able to pay off the remainder before applying, keep focusing on making your payments on time each month, and try to pay as much as you can to help you pay it off quicker.
If you’re ready to apply for a , let our team help you get the loan you need. Visit our to learn more about the mortgage process, and check out our to get a picture of what your home loan will look like. or set up an appointment to speak with one of our .