Effects of Personal Loan on Mortgage Loan Application

Personal loans are becoming a significant part of young-age financing. These loans cater to all your needs, from buying a home or car, renovating your dream home, and planning a holiday to helping you repay your existing loan at once. 

However, you can still apply for a mortgage loan while repaying your existing personal loan. 

But are your doubts holding you back? Know how a personal loan can affect your mortgage loan and its various aspects.

Although personal and mortgage loans are entirely different financial products, an individual’s existing loans can always affect their future loan applications, both positively and negatively. If a personal loan borrower applies for a mortgage loan, the lender will pull a hard inquiry on their credit report and check their repayment history. Each EMI payment has a bearing on their mortgage loan eligibility.

Many borrowers take personal loans to improve their credit scores and boost their credibility. Those who pay their EMIs regularly while maintaining a low DTI ratio and credit utilisation rate have higher chances of getting a mortgage loan with favourable terms and conditions. Let’s look at the effects of personal loans on mortgage loan applications.

Positive Effects

An existing personal loan does not always reduce the chance of getting mortgage loans. It offers the lender a better opportunity to understand the applicant’s credit behaviour and determine the risk involved in lending to them. Here are a few ways applying for a personal loan can positively affect a mortgage loan:

• Those with a good track record of timely payments project themselves as financially disciplined individuals. Timely EMI payments with no defaults and delays showcase the borrower’s seriousness towards money and improve their chance of getting another loan.
• Timely EMI payments reflect positively on the applicant’s credit report and help build a reliable credit history. Lenders will likely offer mortgage loans to applicants with a positive and active credit history.
• Those with a history of timely payments have a better position to negotiate mortgage loan interest rates. A good credit rating makes an individual eligible for a higher loan amount at a lower interest rate.
• A prospective mortgage applicant may use a personal loan to consolidate the existing debts and pay off outstanding balances. It reduces their debt-to-income ratio and incredibly boosts their credit score, improving their chances of getting a mortgage loan.

Negative Effects

Since personal loan application online procedures are swift and accessible, things can quickly go out of hand if the borrower does not handle it responsibly. Here are a few instances when personal loans can negatively affect a borrower’s mortgage application.

• Those who fail to pay their EMIs regularly will hurt their credit score, jeopardising their mortgage loan application.
• Taking multiple loans may increase an applicant’s credit utilisation ratio, reducing their chance of getting more loans.
• An instant loan online increases an individual’s debt-to-income ratio, which may reduce their chance of getting a mortgage loan. However, that depends on the individual’s income. An applicant’s DTI ratio should not be more than 30-40% of their monthly income. If both EMIs come within this limit, they might not have any problem getting a mortgage loan.
• Each loan application pulls a hard inquiry on the applicant’s credit report and reduces the credit score by a few points. Those who have recently taken a personal loan would have reduced their credit rating, which is not a good sign for the mortgage loan application.

Applying for a mortgage loan requires a great deal of planning and execution. Therefore, one must prepare for a loan application several months in advance. Timely repayments, steady bank balance, no outstanding balances, and a low DTI ratio are the best signs of getting a mortgage quickly, even with an existing personal loan.