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Ashley Maready
When you apply for a mortgage, any debts you have -- auto loans, credit cards, and personal loans -- can affect how much you can borrow, and whether you can qualify for a home loan in the first place.
When lenders look at your mortgage loan application, the first consideration isn't necessarily your credit score or down payment, but whether you can afford the mortgage payment. To that end, your monthly payments on any non-mortgage debts are a vital piece of the puzzle. Read on to better understand how a personal loan might affect a mortgage application.
How a personal loan can affect your mortgage application
Taking out new credit while trying to get a mortgage loan can potentially risk your future home purchase, no matter what kind it is. Personal loans can affect your mortgage application in a few different ways, including the following.
Your FICO® Score
Having any loan affects your credit score. The biggest influencing factor is your payment history. Making all of your monthly payments on time has a positive impact on your FICO® Score. To a lesser extent, your credit score benefits from diversity in the types of credit products you've had (called your credit mix). A personal loan is an installment loan, which is different from revolving credit (credit cards). Also, your credit score is meant to get better with age. Having very old accounts of any type can improve your score.
However, if you've just applied, and been accepted for, a personal loan, it can hurt your FICO® Score initially. There's always a hard credit inquiry required with any kind of lending, which can reduce your credit score and the newness of the credit line can also reduce the average age of your credit lines.
Your payment history
The payment history on your personal loan can directly affect your mortgage application. Some mortgage lenders reject your application, for example, if you have two late payments within the past six months, or one account that is 90 days past due, no matter your credit score. So, if you've not been making those payments faithfully, that personal loan is an anchor around your financial neck.
On the other hand, if you have been making those payments on time for more than a few months, this could further help to demonstrate that you're capable of paying a mortgage.
Your debt-to-income ratio
Your debt-to-income ratio is a number that describes your debt relative to how much money you earn, expressed as a percentage. It's calculated by dividing your debts by your income. The more debt you have, the less housing expense you can afford.
Mortgage underwriting standards vary by bank and program. Many mortgage programs simply evaluate your overall debt-to-income ratio, and others, like FHA, look more specifically at the front-end DTI and the back-end DTI
For an FHA loan, your front-end DTI ratio is the percentage of your monthly gross income that you spend on housing expenses. In general, it's best to keep this under 31%.
Your back-end DTI ratio is the percentage of your monthly income that you spend on housing expenses plus all debts combined. FHA considers 43% an optimum back-end ratio limit. With conventional loans, this overall debt-to-income ratio may be allowed to reach upward of 50%
To calculate your DTI and the mortgage payment you qualify for, your lender pulls your credit report from each of the three major credit agencies (Equifax, Experian, and TransUnion). It uses those reports to compare your monthly debt obligations to all of the income that you can (and choose to) document. The underwriter considers:
- Each credit card account minimum payment
- The monthly payment amount on any auto loans
- Whether you pay child support or alimony
- Any liens or judgments against you
- Each personal loan monthly payment
- Any other financial obligations
The lender does not consider monthly bills that are not debts, even if you are under contract with the provider (phone bill, utilities, groceries, subscriptions, etc.).
DTI is somewhat fluid in relation to the other parts of your mortgage application. Generally, your application stands on three legs: your credit score, your DTI, and your down payment. If you make a strong showing in two of these, the lender may be more flexible on the third.
How to calculate DTI including your personal loan
Your housing expenses include monthly payments for principal, interest, taxes, and insurance, plus homeowners association dues if applicable (collectively known as "PITIA").
If your annual household income is $120,000 per year, your monthly gross income is $10,000. You could satisfy the front-end DTI limit for an FHA mortgage with a total monthly housing payment (PITIA) of up to $3,100 per month ($10,000 x 31% = $3,100).
To meet the back-end limit, you would also have to spend less than 43% of your gross income on all your debts. At $10,000 per month, you could spend up to $4,300 on your monthly debts including your housing payment.
| DTI | Gross Monthly Income | DTI Limit | Max Monthly Payments |
|---|---|---|---|
| Front-end ratio (housing costs only) | $10,000 | 31% | $3,100 |
| Back-end ratio (all debt) | $10,000 | 43% | $4,300 |
Data source: Author calculations.
In this example, if you have more than $1,200 per month in other debt payments, you would not qualify for the full $3,100 housing payment. But you could opt for a smaller mortgage, or a house with lower taxes or fewer association fees, and still make it work.
You can calculate your DTI very simply by adding all the minimum monthly payments that will appear on a credit report, plus any alimony or child support and housing costs, then dividing by your income. In the above example, if your car payment is $500 monthly and your credit card debt is $250 monthly and you have a personal loan with a $250 monthly payment, your debts are $1,000. If you want to buy a house with a $3,000 per month payment, your general debt-to-income ratio will be that $4,000 divided by your household $10,000, or 40%. Your front-end ratio will still be within acceptable limits and your overall ratio should still qualify you for either an FHA (your back-end is under 43%) or a conventional loan (your overall DTI is under 50%).
How to improve your mortgage application
You can qualify for a bigger mortgage by tinkering with your debts to get a more favorable debt-to-income ratio:
- Pay off small debts. This is a good way to eliminate monthly payments to afford more mortgage. Mortgage lenders look at the total of your monthly payments to calculate your debt-to-income ratio. Paying off several small credit cards with $25/month payments can quickly free up a lot of income for this calculation.
- Pay down large debts. Some lenders may overlook non-housing debts if they are expected to be paid off in less than 10 months. So if you have 18 months of payments remaining on a $300-per-month car loan, consider paying roughly half the balance in advance, so you only have nine months remaining on the balance.
- Refinance debts. Extending the amount of time you have to pay off a debt can reduce your monthly payments, albeit at the cost of additional interest. For example, refinancing a two-year loan of $5,000 at a rate of 6% into a three-year personal loan at the same rate reduces your monthly payment by about $70 per month. The disadvantage is that you pay off the loan more slowly and thus pay more in interest (about $158 in this case). Another option is to use a lower-interest personal loan to pay off higher-interest credit card or loan debt.
Compare the best personal loans
Get the best rates and terms to fit your needs. Here are a few loans we'd like to highlight, including our award winners.
| Lender | APR Range | Loan Amount | Min. Credit Score | Next Steps |
|---|---|---|---|---|
Rating image, 5.0 out of 5 stars.
5.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair = Poor |
Fixed: 8.99%-29.99% APR (with all discounts)
|
$5,000 - $100,000
|
680
|
|
Rating image, 4.0 out of 5 stars.
4.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair = Poor |
5.20% - 35.99%
|
$1,000 - $50,000
|
None
|
|
Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair = Poor |
10.49% to 19.49%
|
$2,000 - $30,000
|
720
|
Can a personal loan help you get a mortgage?
A personal loan can help you qualify for a mortgage in some cases, such as when it improves your DTI. But it won't be an overnight solution.
Because a personal loan is an installment loan, your credit score might improve if you move your credit card debt to a personal loan and thereby lower your credit utilization ratio. Lowering your debt cost could help you pay down your debt faster and be ready to buy a home sooner. Using a personal loan to refinance higher-interest debts can save or cost you money over time, depending on the loan term.
Using a personal loan to cover the down payment usually doesn't work. In theory, you could get a personal loan, put the cash in a high-yield savings account, and later use it for the down payment on your mortgage. In practice, though, it's typical for lenders to look at your credit applications in the past three, six, or even 12 months. If you applied for a personal loan six months ago and your bank account ballooned around that time, it's likely they'll rule out using that money as a down payment.
The best time to prepare to buy a home is at least six to 12 months before you apply. That gives you time to consider whether a personal loan can help you get a mortgage, or if there are other ways to put yourself in a better position to qualify.
FAQs
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It really depends on where your credit score is today, and how far away you are from applying for a mortgage. In theory, any positive credit line that you're paying on time should help improve your credit score, but a new credit line can also hurt you by reducing the age of your average credit accounts, as well as the small immediate hit to your credit that results from applying. However, if you're not in a hurry to buy a home, many personal loans can be a net benefit to credit, so be sure to discuss your financial goals with your lender before applying.
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Many mortgage lenders will caution you about applying for additional credit when you're trying to qualify for a home loan, or while you have a home under contract, because applying for a loan can affect your application in two ways.
First, it causes a small negative ding to your credit in the immediate aftermath, which may affect your mortgage loan when the underwriters re-check your qualifications in the days before closing. Secondly, a new credit line can change your debt-to-income ratio, which is particularly hazardous if you're already stretching to qualify for a home. Once you're too far outside of range, the best lender in the world can't get you back inside. Only time can do that.
Because mortgage applicants are qualified for their mortgages near the beginning of the process and again just prior to closing, if anything changes substantially, you may no longer be able to meet the requirements of the specific program under which your loan was underwritten, and you may be unable to close at all.
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Kimberly is a career writer and editor with more than 30 years' experience. She's a bankruptcy survivor, small business owner, and homeschool parent. In addition to writing for The Motley Fool, she offers content strategy to financial technology startups, owns and manages a 350-writer content agency, and offers pro-bono financial counseling.
Kristi Waterworth has been a writer since 1995, when words were on paper and card catalogs were cool. She's owned and operated a number of small businesses and developed expertise in digital (and paper) marketing, personal finance, and a hundred other things SMB owners have to know to survive. When she's not banging the keys, Kristi hangs out in her kitchen with her dogs, dropping cheese randomly on the floor.
Fact Checked
Ashley Maready
Ashley Maready is a former history museum professional who made the leap to digital content writing and editing in 2021. She has a BA in History and Philosophy from Hood College and an MA in Applied History from Shippensburg University. Ashley loves creating content for the public and learning new things so she can teach others, whether it's information about salt mining, canal mules, or personal finance.
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We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Kimberly Rotter has no position in any of the stocks mentioned. Kristi Waterworth has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Upstart. The Motley Fool has a disclosure policy.
*Upstart Loan Disclaimer
The full range of available rates varies by state. The average 3-year loan offered across all lenders using the Upstart platform will have an APR of 21.97% and 36 monthly payments of $35 per $1,000 borrowed. For example, the total cost of a $10,000 loan would be $12,646 including a $626 origination fee. APR is calculated based on 3-year rates offered in the last 1 month. There is no down payment and no prepayment penalty. Your APR will be determined based on your credit, income, and certain other information provided in your loan application.
Citi Personal Loan disclaimer:
**Rates as of 10-06-2023 . Your APR may be as low as 10.49% or as high as 19.49% for the term of your loan. The lowest rate quoted assumes excellent credit, and a loan term of 36 months or shorter. Otherwise, a higher rate will apply. For example, if you borrow $10,000 for 36 months at 15.99% APR, to repay your loan you will have to make 36 monthly payments of approximately $351.52.
There is a 0.5% APR discount if you enroll in automatic payments at loan origination. Additionally, existing Citigold and Citi Priority customers will receive a 0.25% discount to the interest rate. If you are in default, your APR may increase by 2.00%. No down payment is required. Rates subject to change without notice.
You must be at least 18 years of age (21 years of age in Puerto Rico). Co-applicants are not permitted. Loan proceeds cannot be used for post-secondary educational or business purposes.
If you apply online, you must agree to receive the loan note and all other account disclosures provided at loan origination in an electronic format and provide your signature electronically.
Credit cards issued by Citibank, N.A. or its affiliates, as well as Checking Plus and Ready Credit accounts, are not eligible for debt consolidation, and Citibank will not issue payoff checks for these accounts. If you are unsure of the issuer on the account, please visit https://www.citi.com/affiliatesproducts for a list of Citi products and affiliates.
*SoFi Personal Loan Disclaimer
Fixed rates from 8.99% APR to 29.99% APR reflect the 0.25% autopay interest rate discount and a 0.25% direct deposit interest rate discount. SoFi rate ranges are current as of 02/06/2024 and are subject to change without notice. The average of SoFi Personal Loans funded in 2022 was around $30K. Not all applicants qualify for the lowest rate. Lowest rates reserved for the most creditworthy borrowers. Your actual rate will be within the range of rates listed and will depend on the term you select, evaluation of your creditworthiness, income, and a variety of other factors.
Loan amounts range from $5,000–$100,000. The APR is the cost of credit as a yearly rate and reflects both your interest rate and an origination fee of 0%-7%, which will be deducted from any loan proceeds you receive.
Autopay: The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Autopay is not required to receive a loan from SoFi.
Direct Deposit Discount: To be eligible to potentially receive an additional (0.25%) interest rate reduction for setting up direct deposit with a SoFi Checking and Savings account offered by SoFi Bank, N.A. or eligible cash management account offered by SoFi Securities, LLC (“Direct Deposit Account”), you must have an open Direct Deposit Account within 30 days of the funding of your Loan. Once eligible, you will receive this discount during periods in which you have enabled payroll direct deposits of at least $1,000/month to a Direct Deposit Account in accordance with SoFi’s reasonable procedures and requirements to be determined at SoFi’s sole discretion. This discount will be lost during periods in which SoFi determines you have turned off direct deposits to your Direct Deposit Account. You are not required to enroll in direct deposits to receive a Loan.
Impact to credit score: 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.