The credit rating system has become the cause of nightmares for many of the borrower those planning for a mortgage. When mentioned, it brings the heebie-jeebies, often taking on a dark and mysterious aura, especially for people who have not researched on their credit score health.
Part of the question most would be from the mortgage borrowers if their new personal loan will mess up their chances of acquiring a mortgage. The answer should begin with the advice that banks are not CSI. They are also not out to get you or deny you credit facilities over the weakest of reasons.
Instead, banks sell credit. They make massive profits off it, so they do like to lend. In circumstances where there have been simple financial blunders, they will instead give you a listening ear first rather than write you off.
So, will a personal loan affect your mortgage application?
A mortgage provider’s first obligation before giving you a loan is to ensure that you can pay it back. This means that you should have enough left at the end month to make repayments once your basic needs are met.
The financier will, consequently, pore through your income before extending the facility. They will search for financial commitments you have made. This includes childcare checks, insurance, or debts.
They will, with the information at hand organizeyour potential income and expenditure. If you, therefore, have a personal loan as part of your expenses, it could show the creditor that you might not be able to pay off two large debts depending on your income.
If the debt repayments force you into a situation where you have nothing left to cover your mortgage repayments, then the financier will instead not take the risk. On the other hand, if they decide that you can afford a measure of it while repaying your personal debt, they might be inclined to extend you less than what you needed.
If you, consequently, are in the run-up for that dream home purchase, you need to think about the state of your finances carefully. Do you really need to fund that holiday with a high-interest debt just before a home purchase? Probably not.
Hold off that plan for more credit therefore if you are about to take on a mortgage. Once you have your finances in check, go for that mortgage but only if you can foot the payments alongside your other repayments.
So what happens to you if you are already servicing a personal advance?
If you have come back from your overseas holiday, paid off with such an advance, and have found your dream home, do not despair. There are options you could consider which include;
- Paying off the advance in full first. It is a long wait, but if you do this and wait for at least three months before approaching a financier, you will be given the green light. The reason behind the wait is to ensure that the repayment no longer reflects in your account statements. Remember, banks are not CSI, so they only care about the facts as revealed by your statements.
- If you, like many other homeowners, cannot wait till your last repayment is made, then you have no other choice. Approach the financier and state your case. The only disadvantage here is that depending on the health of your balance sheet, you might get less than you need for your home credit.
What do you do if you have missed a repayment?
So, you are about to approach the money man for a home loan, but that personal loan repayment with nation 21 while having bad credit, you missed a few months back is at the back of your mind. Will they sign you up? While this is not an ideal situation, it is not the end of your homeownership dream.
First, expect that the action of missing a repayment has messed up your credit rating. Nevertheless, you are still in the running because banks look for the reason behind the failure first. They also look for patterns of behavior.
If you have not missed repayments before and have no other poor credit calls, then you have a case. If you have caught up with the remittances fast and dealt with your financier, then they will extend a helping hand.
How a debt to income ratio is calculated
Underwriters often look at a debt to income ratio (DTI) before extending a credit facility. There is, for instance, your front-end DTI, which is composed of the amount of your income spent on living expenses. The value should be below 28%.
They also examine your back-end DTI. This is the sum spent not only on living expenses but debts as well. A good percentage here is under 36% for a mortgage application to fly through. If you have a significant obligation that impedes on the health of your DTI, then an FHA mortgage for a first time home purchase is the better way to go.
These credit facilities also have more straightforward repayment requirements. They also allow for a front-end DTI of up to 31% and back end ratios of 43%. They nonetheless will have higher mortgage insurance costs.
Ways you can improve your mortgage application
- Pay off every small debt
While small, advances such as plastic money repayments should be paid off fast. Once they are out of the picture, you will have more cash at hand, for a more jumbo mortgage.
- Begin to repay larger debts
The money man mostly considers non-housing obligations if you have more than ten months left to make repayments. If you therefore have,more extended time spans left, pay off a chunk of it in advance and bring the repayments period down.
- Refinance your debts
Find ways to extend the time left to pay off borrowed money, which will cut down on your repayment amounts. It might increase the interest, but it will enhance your DTI ratio before the moneyman.
- Make timely repayments
If you keep to the end of the deal and pay your debt in time, it will embellish your FICO score. The alternative will lock you out of a good mortgage deal.
- Shut down unused cards
If your record shows that you have access to multiple credit sources, it will harm your chase for a good mortgage deal. It will tell the moneyman that you are most likely to get into more debt in the future. So, put away all the credit cards that you do not need and close them off.
- Use mortgage lenders
If your FICO score is in the dumps, go to a mortgage lender instead. These firms have higher rates, but they will lend you a listening ear. A mortgage broker also can advise you on the best way forward and show you how to structure your application.
Are there any benefits to a personal loan when getting a mortgage?
Over 83.5 million or 34% of the American population takes out personal loans each year. Most of them a full 31% take them for emergencies, especially vehicle-related ones. In second place is for bills at 26%, while 21% of the population takes them for that unexpected financial crunch. The advance is also used to pay for tuition, and for debt refinancing.
These debts can, in some cases, assist you in acquiring a mortgage. If for instance, you use them to reorder and repay your debts, you will be better placed to borrow from your financier. It is not an overnight solution, but it works. This arrangement could also reduce your interest charges helping you pay off the credit faster. Once the debt is paid, you will have more breathing space financially to make a home purchase.