Personal Loans, Mortgages, and How They Can Interact

By Diana Kelly Levey · March 08, 2022 · 6 minute read

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Personal Loans, Mortgages, and How They Can Interact

If you’re planning to apply for a mortgage in the near future, but also thinking about taking out a personal loan for another purpose, there are things to know about how personal loans and mortgages interact with one another and if a personal loan will impact your finances in a positive or negative way.

So, what are personal loans? Simply put, personal loans are borrowed funds that can be used to pay for things like a wedding, vacation, home repair or improvement, or a medical bill for you or a pet.

Can Personal Loans Affect Mortgage Applications?

When you apply for a mortgage, the lender looks at your full financial picture. That picture includes your credit history, credit score, and any other debt you might have. If you have a personal loan, the lender will look at the amount of the loan in relation to your income and other debt, and if you’ve made regular, on-time payments.

Perhaps you’re buying land with a personal loan and now are ready to build, but need to take out a mortgage loan to do so. It may have been necessary to have a loan for the land purchase, but there are benefits and risks of personal loans and they may have an impact on a home mortgage loan.

Negative Effects

As the lender looks at an applicant’s mortgage application, they’ll take note of any missed payments on personal loans. Missed or late payments on other debts, including personal loans, may negatively impact your ability to be approved for a mortgage with a favorable interest rate and terms.

A lender will also examine your debt-to-income ratio (DTI). If your debts from personal loans are high in relation to your income, and the lender believes it’s too big of a risk to loan you money for a mortgage, then getting a personal loan could affect your chances of getting a mortgage.

Positive Effects

If you have a personal loan that is a reasonable amount within your DTI, your personal loan payment history shows that you regularly pay on time, and you’re consistently paying down your debts, the 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

Your personal loan history and the amount of money you owe in personal loan debt can have an affect on your ability to get a mortgage. Here’s how they play a part:

Credit Score

It’s possible to use a personal loan to increase your credit score if it’s a new component in your credit mix. A higher credit score could help you get a lower interest rate when you apply for a home mortgage. Your credit score is one indication to the lender of how likely you are to be able to repay the loan. Having too many outstanding personal loans and a high DTI can have a negative impact on your credit score.

Recommended: Typical Personal Loan Requirements Needed for Approval

Payment History

If you make regular, on-time payments on a personal loan, it could increase your credit score, which could have a positive impact when applying for a mortgage.

Not making regular, on-time payments on your personal loan might lower your credit score, leaving you with higher-rate interest rate options on a mortgage. When you have a large personal loan, paying it down with regular payments is a good way to show lenders that you’re a good candidate for a mortgage.

Debt-to-Income Ratio

Your DTI tells lenders how much of your monthly income is being used to pay your debts. In general, lenders prefer to see less than about 30% of an applicant’s income going toward debt payments each month. Paying down debts can improve your DTI to a more creditworthy percentage for lenders to consider when assessing your mortgage loan application.

Recommended: The SoFi Guide to First-Time Home Buying

What a Debt-to-Income Ratio Is and Why it Matters

Before you fill out a mortgage application, it may be a good idea to verify your DTI. If the percentage is already nearing the 30% level, it might be wise to postpone taking on any new debt, including a personal loan. More debt will likely increase your DTI, and the lender may consider you a higher-risk borrower if they don’t think that you have enough income left to pay your mortgage.

If you do take out a personal loan before applying for a mortgage, spacing out the two applications could be a good maneuver. Because taking on new debt might lower your credit score temporarily, if you take on that new debt too close to when you plan to apply for a mortgage, a lower credit score might mean a higher mortgage interest rate.

Making regular payments on personal and student loan debt and paying down medical bills are some ways to lower your DTI. If you’re planning to co-borrow a mortgage, you might consider working together to lower debts or find ways to increase your income, if possible, before you apply for a home loan.

Tips To Help Your Mortgage Application

There are some tips you may want to consider when learning what is needed to buy a house, how to expedite the application process, and make the path to your goal — getting a mortgage — just a little smoother.

•   Reviewing your credit report and correcting any errors or any discrepancies.

•   Improving your credit score by paying down debt balances.

•   Making sure your financial records are accurate so you’re prepared when looking at your financial history with a lender.

•   Gathering required mortgage application paperwork such as recent pay stubs, tax returns, bank statements, debts statements, and other records that your mortgage lender may request.

•   Familiarizing yourself with terminology you might see on the mortgage application, making it easier to understand everything before signing the loan agreement.

•   Understanding what you can afford by meeting with a loan officer to learn more about home mortgage products and services offered so you have a better understanding of what’s available.

•   Knowing your credit score so you’ll know what interest rates and terms might generally be available to applicants with a score similar to yours.

•   Researching and comparing lenders and their products, rates, and terms before deciding who you’ll work with.

•   Locking in your interest rate when you get an offer that works for your financial situation. Interest rates fluctuate regularly and locking in your rate guarantees you’ll have that rate at closing, no matter what the market rate is at that time.

•   Be prepared to be patient, but ready to act fast. Loan processing can take a few weeks, and you might be asked to submit additional paperwork with little notice. Once your loan is cleared to close, you will have a day or two to approve the paperwork. Then, you and your real estate team can set up the closing on your home.

Recommended: 5 Tips for Finding a Mortgage Lender

The Takeaway

If you’re wondering, “Will a personal loan affect my mortgage application,” the answer is yes, but whether it affects it positively or negatively depends on how you manage the debt. In general, consistent and timely payments will have a positive effect, and inconsistent and late payments will have a negative effect. If you look like a low-risk borrower on your mortgage application because you’ve been responsible for past and current debt, a lender may be more likely to approve your loan.

If you’re looking for a personal loan with competitive rates and terms to fit a variety of budgets, there might be a SoFi Personal Loan option that works for you. There are no fees required with an unsecured personal loan from SoFi, and you can check your your personal loan rate in just one minute.

Check your personal loan rate at SoFi

Photo credit: iStock/kate_sept2004

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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.

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 .


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