There’s so much to consider when applying for a mortgage that it can seem like there’s too much to think about. This can especially be the case if you have open loans, and don’t know how, or if, they will impact your mortgage application.
We’ve summed up if having a loan open can impact your mortgage application, and what you need to know about having loans and mortgages at the same time. FInd out more in our Octagon Capital blog:
What is a Personal Loan?
A personal loan is an amount of money that you borrow, and pay back over a set period of time. Sometimes known as unsecured loans, personal loans are not secured against any of your assets such as your home.
People choose to take out personal loans for a wide variety of reasons, ranging from help with the rising cost of living, to go on holiday, to fund home improvements, and amongst other things, to pay for vehicle repairs. It’s absolutely essential to remember that you should only ever borrow what you know you can afford to pay back, as missed repayments can damage your credit score and result in late fees.
How Do Personal Loans Affect Mortgage Applications?
Mortgage lenders will look at any existing debts when deciding whether or not to approve a mortgage and how much they are willing to lend the borrower.
Before approving a mortgage, lenders will always assess a lender’s credit score in order to determine whether they can meet monthly mortgage repayments.
Therefore any existing debt, including personal loans, will impact a lender’s decision. However, this is not necessarily a bad thing.
If you have existing personal loans but can prove that you are able to reliably meet payment obligations, this could support your case as a reliable borrower. The most important factor will be showing that your income is greater than your outgoing payments, including any loans; this is known as your debt-to-income ratio.
When Will Applying for Loans Negatively Impact Mortgage Affordability?
The timing of your loans can have a negative impact on your mortgage. For example, if you take out a personal loan in the three months leading up to applying for a mortgage, this could negatively impact your credit score and subsequently your chances of being approved for a mortgage.
In general, experts recommend not taking out a personal loan in the six months before applying for a mortgage.
The following loans will impact your credit score and could, therefore, impact your chances of getting a mortgage:
- Personal loan
- Credit card
- Car finance
- Overdraft
- Utility contract
- Mobile phone contract
Applying for any of the following loans will register a mark on your file:
- Personal loan
- Car finance
- Credit card
- Overdraft
- Mobile phone contract
- Utility contract
You should also make sure that any loan searches do not impact your credit rating; the more searches you have with a short amount of time, the less likely you are to be approved for a mortgage.
Can You Take Out a Mortgage if You Have a Personal Loan?
If you have a personal loan, you will still be able to take out a mortgage. However, the most important factor from a lender’s perspective is mortgage affordability and whether a borrower can afford to take out a mortgage on top of any existing debts.
As a borrower with existing loans, it will be your responsibility to prove to the lender that you can repay all of your debts and that you will not be a risk to the lender.
Working with a mortgage broker or mortgage advisor can help you assess the best option for your personal circumstances. These market experts will also be able to recommend lenders who can understand your loan situation and who will be more likely to approve your mortgage application without long-term negative impact on your credit rating.
Could My Personal Loan Improve My Mortgage Application?
In the right circumstances, existing personal loans may even improve your mortgage application.
Having a personal loan which is paid back on time can go a long way in boosting your credit rating and proving that you are a responsible borrower. The more of your loan that you are able to repay before applying for a mortgage, the better you will look to potential mortgage providers.
You can also be strategic but borrowing money through a personal loan and putting the cash in a high interest savings account. This means that you have accrued extra funds which can, in turn, be put forward as a higher mortgage deposit.
Can You Take Out a Loan After You Have a Mortgage?
If you have just received a mortgage approval, it is not an opportune moment to take out a loan. This includes applying for any credit cards or additional finance.
When applying for a loan, you will need to be approved by the lender before fully securing the mortgage. As part of the application, the lender will carry out in-depth credit checks. Therefore, if you take out any further loans or credit after the approval process, this will affect your existing application and can be a red flag for lenders. If the lender believes that this new credit can impact your mortgage repayment, they could even withdraw the mortgage offer.
Even after receiving the mortgage offer, you should not take on additional debt. If you know that you may want to take out further credit after the mortgage application process, you should talk to your lender beforehand to understand the implications and how it may affect your application.
Once you have completed on your mortgage, you may find that you incur extra costs, such as home improvements or furniture, which may require additional funds; thus, you may find yourself in need of credit or a personal loan.
At this stage, there is no real reason why you should not be able to take out a personal loan as long as you can afford the repayments. However, the longer you wait between your mortgage completion and taking out additional credit, the better.
As an alternative, many homeware stores offer 0% finance deals meaning that you may be able to afford these payments without the need of taking out additional lines of credit with interest rates.
