Your personal loan may or may not negatively affect your mortgage application.
Essentially, lenders want to know if you are capable and willing to pay your mortgage. To determine this ability to repay and your willingness, they look at your credit score, debt-to-income ratio, employment and income, and reserves/assets, among a myriad of factors.
Your credit score and debt-to-income ratio encompass a lot of transactions. This is where the impact of your personal loan matter in your mortgage application. Let’s find the answer to this question here.
Let’s help you find a lender, too.
Personal Loans: An Introduction
For starters, personal loans are an
unsecured type of debt taken out for all purposes. You don’t need to pledge an asset, a house, a car or jewelry to obtain a personal loan but there are instances where an asset is required for the loan.
These installment loans are harder to qualify for to make up for the lack of collateral. Depending on the strength of your credit score and other qualifications, you might be able to borrow $10K or $50K. This type of loans has a fixed interest rate with a fixed repayment term of up to 10 years.
The act of getting a personal loan affects two factors important in qualifying for a mortgage:
- Debt-to-income ratio
Your Credit Score
From inquiring about personal loans among lenders to applying for the loan, these activities are reported to the credit reporting bureaus, Equifax, Experian, and TransUnion, who will then compile these into credit reports and sell them to lenders.
The act of inquiring for any loan results in hard inquiries that can cost you a few points off your credit score. For as long as the taking out of the personal loan is well spaced out from your other loans, it won’t be a problem.
Pursuing new credit is 10% of your FICO score, after all.
What you’ll need to be careful is your payment history, which is a whopping 35% of your FICO score. If you’ve been diligent in your personal loan’s payments, you are contributing to your good overall payment behavior. Missing out on a single payment has an opposite effect on your score.
Your Debt-to-Income Ratio
The debt-to-income ratio measures your gross monthly
debt load relative to your gross monthly income. It’s a metric lenders use to determine if you’re living below, at, or above your means.
This way to lenders.
It has two parts: (1) the front-end ratio which calculates of how much of your monthly income goes to your monthly housing expense (rent or mortgage payment), and (2) the back-end ratio which calculates how much of your monthly income goes to your other monthly debts.
An advisable DTI ratio is 28%/36%.
Your personal loan payments go toward your back-end ratio and inflate it while it remains unpaid. Some lenders might be okay with a high back-end ratio but others might not be as forgiving especially conventional lenders.
VA loans, for instance, put more weight on residual income, which is what is left after the debt and expenses. It still means that your personal loan is included in the computation.
What this all leads is having a personal loan in itself has an impact on your mortgage application.
But as to whether this impact is negative or not would depend on your behavior and the circumstances surrounding the loan:
- On credit score: if you have been taking on too much debt in a short span of time and not making your payments on time and regularly.
- On debt-to-income ratio: if you already have a handful of obligations and yet added another one via your personal loan.
At the end of the day, it’s up to the lenders to decide whether they’ll give you a loan or not based on a holistic evaluation of all important factors involved.
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