There could be many reasons you are seeking a mortgage beyond your 50s. Maybe you’re recently single. You are combining homes. Or you are ready to downsize. You found your dream home. Or, lucky you, you’re ready for that second home. Maybe it’s been a while since you’ve thought about getting a mortgage. So perhaps you’re wondering if your personal loan affects your mortgage possibilities.
It is expected from all mortgage providers to carefully sift through your income and outgoings when deciding whether or not to offer you a mortgage. It’s to make sure they will lend to people who can afford the monthly repayments. In particular, they will check the borrower’s fixed outgoings like existing credit commitments, car insurance, and childcare.
In such a case, if you plan to purchase a home in the next few years, applying for a personal loan can potentially diminish the amount you can borrow. It could also affect your credit score. All of which depends on how you manage the debt.
If you’re still resolved to go this path, here are the important things that you need to know.
How Does a Personal Loan Work?
A personal loan is an installment credit that offers the borrower access to the full loan amount upfront as a trade-off for installment payments within the agreed repayment terms.
What sets a personal loan apart from other loan types is that it’s unsecured. It means the borrower doesn’t need collateral or guarantee to qualify. But, this comes with a catch, given that you can use the fund for just about anything you want.
A personal loan has higher interest rates compared to secured loans like mortgage and auto loans. With that, it’s not always the best option, especially if you plan to make a big purchase.
Do Personal Loans Impact Your Mortgage Application?
A personal loan isn’t entirely bad news to a mortgage lender’s eyes. But, it can have a positive or negative impact on your application, depending on what kind of borrower you are.
Lenders like CreditNinja Financing typically look for two primary factors when it comes to personal loans: how your debt affects your DTI (debt-to-income ratio) and how you manage your debt.
If you pay your dues on time, it will enhance your credit score because it’s proof that you’re a responsible borrower. So long as there are no missed repayments and you pay your personal loan in full, your mortgage application will be just fine.
On the flip side, if you miss repayments, your personal loan can negatively affect your mortgage application. It’s a sign that you’re not a responsible borrower. It will also put a black mark on your credit score for years.
How to Manage the Debt
It’s crucial with any debt to make on-time monthly payments, particularly if you plan to apply for a mortgage loan.
Know that a mortgage is a long-term commitment for both the borrower and lender. So if you have missed payments on your personal loan, you may not qualify, or if you do, it comes with a higher interest rate.
But then again, if you pay all your bills on time, it will improve your credit score over time. It improves your probability of getting approved for a mortgage loan as well.
Your DTI (Debt-to-Income Ratio)
Mortgage lenders will check your back-end DTI or your total monthly debt payments divided by your monthly gross income. It will be their basis for calculating the loan amount you’ll qualify for.
There’s also the so-called front-end DTI or the amount of your gross income that goes to housing costs only. Now, if your back-end DTI ratio is quite low, the payment for personal loan payment will not make a big difference.
Most lenders favor a back-end DTI below 36%. If your DTI is higher than the preferable rate for personal loan payment, you may not qualify for as much of a mortgage loan as you need or want.
What if You’re Still Paying Off a Personal Loan?
It’s best to continue making your payments on time if you’re still paying off a personal loan but plan to apply for a mortgage.
Settling the debt beforehand boosts your chances of getting the loan amount you’re looking for. Do it, especially if you’re almost done with your repayment term and can afford to pay off the remainder. If you can’t, focus on keeping a positive payment history.
Further, find other ways to enhance your likelihood of getting approved for a mortgage loan with terms that are favorable in your end.
How to Increase Your Chances of Getting a Mortgage?
Having a personal loan doesn’t necessarily make or break your odds of getting approved for a mortgage. But if you’re worried, there are many ways you can do to improve your chances.
First and foremost, get your credit ready for a mortgage through checking your credit scores and reports. Check if there’s anything you need to fix, settle, or address before application. If there are issues, wait until your credit improves as it can save you thousands over the life of a mortgage loan.
Next, steer clear on getting new credit before your mortgage application. Increasing your DTI even further is the last thing you want to happen. Consider paying down some credit cards and loans to potentially decrease your DTI.
Lastly, take some time to save up for your down payment. The bigger the down payment, the lesser the risk you’ll pose, which could potentially increase your approval rate.
Don’t Jump Into a Mortgage Too Soon
Homeownership, whether it’s your primary or secondary home, is always an exciting endeavor, which makes it easy to get swayed in the emotional side of things. However, if you commit to a mortgage loan before you even become financially stable, it can become more of a problem than a blessing.
That being said, always prioritize checking and improving your credit score before applying for a loan. It’s also wise to create a budget to find out how much you can actually afford to pay every month while considering the lender’s offer. The rate of interest might not be feasible for you.
Don’t forget about other housing expenditures too, such as property taxes, homeowners insurance, private mortgage insurance, maintenance, repairs, and more. Preparing prior to submitting a loan application will give you a better chance of getting approved.
The most important thing for lenders when looking at your mortgage application isn’t necessarily your credit history or credit score. It’s your capacity to pay the monthly payments in the first place. It’s a vital piece of the puzzle that every borrower shouldn’t miss. So look at reducing any personal loans if you are seeking a new mortgage.