When you apply for a mortgage, any outstanding debts you have — including personal loans, credit cards, and auto loans — can impact how much of a mortgage you can get, and whether you even qualify in the first place.
If you’re planning to buy a home in the next couple of years, applying for a personal loan could potentially reduce how much you can borrow. A personal loan can also affect your credit — this impact could be positive or negative depending on how you manage the loan.
Whether you’re thinking about getting a personal loan or currently paying one off, here’s what you need to know about how personal loans interact with mortgages.
How Do Personal Loans Work?
A personal loan is a lump sum of money borrowed from a bank, credit union, or online lender that you pay back in fixed monthly payments, or installments. Unlike mortgages and auto loans, personal loans are typically unsecured, meaning there’s no collateral (an asset that a borrower pledges as security for a loan) required.
Lenders typically offer loans from $1,000 to $50,000, and this money can be used for virtually any purpose. Common uses for personal loans include:
• Debt consolidation
• Home improvement projects
• Emergencies
• Medical bills
• Refinancing an existing loan
• Weddings
• Vacations
Personal loans usually have fixed interest rates, so the monthly payment is the same for the term of the loan, which can range from two to seven years. On-time loan payments can help build your credit score, but missed payments can hurt it.
💡 Quick Tip: Some lenders can release funds as quickly as the same day your loan is approved. SoFi personal loans offer same-day funding for qualified borrowers.
Can Personal Loans Affect Mortgage Applications?
Yes, getting a personal loan could impact a future mortgage application. When you apply for a mortgage, the lender will look at your full financial picture. That picture includes your credit history (how well you’ve managed debt in the past), how much debt you currently have (including personal loans, credit cards, and other debt), your income, and credit score.
Depending on your financial situation, getting a personal before you buy a house could have a positive or negative impact on a mortgage application. Here’s a closer look.
Negative Effects
A personal loan could have a negative impact on your mortgage application if the loan payments are high in relation to your income. A lender may worry that you don’t have enough wiggle room to cover your current expenses and debts, plus a mortgage payment.
A personal loan also impacts your credit score. If you’ve missed payments or paid late, this impact could be negative. A lower credit score can make it more difficult to get a mortgage, especially one with a competitive interest rate.
Positive Effects
If you have a personal loan that is a reasonable size (relative to your income), your personal loan payment history shows that you regularly pay on time, and you’re consistently paying down any other debts, a mortgage lender could see that as a positive indicator that you’d likely be a low-risk investment.
How Personal Loans Can Affect Getting a Mortgage
Here’s a closer look at the ways in which getting a personal loan can affect your ability to get a home mortgage.
Credit Score
Your credit score is one indication to a lender of how likely you are to be to repay a loan — or, in other words, how much risk your represent to the lender. A personal loan can affect your credit score in several different ways. These include:
Payment History
Your bill-paying track record has the most weight when it comes to your credit score. That means if you make regular, on-time payments on a personal loan, it could have a positive impact on your credit. That, in turn, could have a positive impact when applying for a mortgage.
Not making regular, on-time payments on your personal loan, on the other hand, can negatively impact your credit, leaving you with higher-rate interest rate options on a mortgage.
New Credit
When you apply for a personal loan, the lender will run a hard credit inquiry. This type of credit check can have a small negative impact on your credit for 12 to 24 months. As a result, applying for a personal loan (or any type of new credit) can negatively impact your credit score in the short term.
Credit Mix
Having a variety of different account types can be good for your credit. If your credit report only has revolving accounts, like credit cards, getting a personal loan (which is a type of installment credit) could diversify your credit mix and have a positive influence on your credit score.
Debt-to-Income Ratio
Your debt-to-income (DTI) ratio refers to the total amount of debt you carry each month compared to your total monthly income. Your DTI ratio doesn’t directly impact your credit score, but it’s an additional factor lenders may consider when deciding whether to approve you for a new credit account, such as a mortgage. Having a personal loan will increase your debt load and, in turn, your DTI ratio.
To calculate your DTI ratio, you add up all your monthly debt payments and divide them by your gross monthly income (that’s your income before taxes and other deductions are taken out). Next, convert your DTI ratio from a decimal to a percentage by multiplying it by 100.
In general, the highest DTI ratio you can have and still get qualified for a mortgage is 43% (including the mortgage payment). However, lenders prefer a DTI ratio lower than 36%, with no more than 28% of that debt going towards mortgage payments.
Recommended: First-Time Home Buyer Guide
Should You Pay Off Your Personal Loan Before Applying for a Mortgage?
If you already have a personal loan, are close to the end of your repayment term, and can afford to pay off the remainder before applying, eliminating the debt could improve your chances of getting the mortgage amount you’re looking for.
Another reason why you may want to pay off your personal loan before buying a home is that home ownership generally comes with a lot of additional expenses. Not having a personal loan payment to make each month can free up cash you may need for other things, like mortgage payments, homeowners insurance, and more.
That said, if paying off a personal loan will use up money you had earmarked for a downpayment on a home or leave you cash poor (with no emergency fund), it might be better to keep making your monthly payments, rather than pay off your personal loan early.
💡 Quick Tip: If you’ve got high-interest credit card debt, a personal loan is one way to get control of it. But you’ll want to make sure the loan’s interest rate is much lower than the credit cards’ rates — and that you can make the monthly payments.
Tips To Help Your Mortgage Application
Generally speaking, having a personal loan won’t make or break your odds of getting a mortgage. If you’re concerned about being approved, however, here are some steps that can help.
• Review your credit report and correcting any errors or any discrepancies.
• Consider paying down debt to lower your DTI ratio.
• Avoid applying for new credit leading up to your mortgage application.
• Consider taking some time to increase your down payment amount (the more you can put down, the less risk you pose to a lender).
• Research and compare lenders and their products, rates, and terms before deciding who you’ll work with.
• Lock in your interest rate when you get an offer that works for your financial situation.
Recommended: 5 Tips for Finding a Mortgage Lender
The Takeaway
A personal loan can have a negative or positive impact on your mortgage application. If you’re not planning to apply for a mortgage right away, and can comfortably manage the personal loan payments (and possibly even pay off the loan early), getting a personal could have a positive effect on your credit and make it easier to get a mortgage.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
Photo credit: iStock/kate_sept2004
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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