Getting a Personal Loan Before Buying a House

If you consider getting a personal loan for excellent credit before buying a home, you should know the implications. First, you should know that personal loans come with shorter terms than mortgages, so your monthly payments will be higher. 

While you can save money by not having to pay down the amount, this benefit will be short-lived. You might also miss out on opportunities requiring little or no down payment.

Paying off a personal loan before applying for a mortgage

If you can’t afford a mortgage and have a personal loan, you might consider paying it off before you apply for a mortgage. Defaulting on a personal loan will negatively affect your credit score and could even result in wage garnishment. In addition, a mortgage payment default could mean losing your home. 

Depending on your debt-to-income ratio, paying off your personal loan early can negatively impact your credit score. It depends on how many other loans are listed on your credit report. Even though your loan will be listed as closed on your credit report, open accounts are weighed more heavily by FICO. A personal loan should only be paid once it reaches a certain percentage of your total debt.

Impact of personal loan on debt-to-income ratio

In addition to lowering your debt-to-income ratio, you can take out a personal loan to consolidate your other higher-interest debt. Because personal loans have a fixed monthly payment, you can afford to make them, and your DTI will decrease. 

When you consolidate your debt, you may be eligible for better interest rates and pay down your balances faster. To get the best DTI possible, you should compare rates and terms.

When applying for a mortgage, lenders check your total debt-to-income ratio. A high front-end DTI is the gross income percentage for housing costs. Your personal loan payment may not affect your qualifying ratio much. 

However, you may have trouble getting a mortgage if your back-end DTI is higher than 36%. Whether or not a personal loan helps your debt-to-income ratio before buying a house depends on various factors.

Impact of personal loan on credit score

Suppose you’re considering applying for a home loan or mortgage. In that case, you may be concerned about the impact of a personal loan on your credit score. While this type of loan doesn’t affect your credit score negatively, it does cause a temporary dip in your score. 

The good news is that you can make timely payments and improve your credit score over time. One important tip to avoid the negative impact of personal loans on your credit score is to set up automatic costs and budgets.

Conclusion

Taking out a personal loan can be a good idea if you don’t have much cash available to purchase the house. Personal loans often have lower interest rates than credit cards, and you don’t have to put your home up as collateral. 

However, if you cannot make payments on your loan, you may face serious financial consequences. In addition, a personal loan will help you consolidate debt because you can make one payment every month, which is much easier than making payments on multiple credit cards.