Personal loans and mortgages are common types of debt. Here’s how they impact each other.
Many Americans use unsecured personal loans to pay off high interest debt, make major purchases, and cover unexpected expenses. As of Q4 2022, the total unsecured personal loan balance was $222 billion, up from $167 billion the previous year, according to TransUnion.
Having a personal loan isn’t necessarily a problem if you have a competitive rate as these loans come with fixed rates that make them predictable and easy to manage. However, if you are planning on purchasing a home, you might want to consider paying off your personal loan before you apply for a mortgage.
Here are two reasons why paying off your personal loan before applying for a mortgage is a good idea.
1. It boosts your chances of qualifying.
Many Americans have personal loans and mortgages, but having less debt can increase your chances of qualifying for the mortgage you want. Mortgage lenders look at a variety of factors when qualifying your application. A major factor is your credit score. The higher your credit score, the more likely you are to be approved for funding and with a more favorable interest rate. A better interest rate can reduce your monthly mortgage payment.
Another mortgage qualifying factor is your debt-to-income ratio. This ratio represents the total amount of your monthly debt versus the amount of income you earn. If you can lower your debt-to-income ratio, you can improve your chances of getting approved for a mortgage. Paying off your personal loan balance before you apply for a mortgage will lower your debt and your ratio, making it easier to qualify for a mortgage.
2. It makes it easier to manage your finances.
Having a mortgage can significantly increase your monthly bills, eating away at your income and making it more challenging to budget. When you purchase a home, you’ll have a lot of other expenses to manage in addition to your mortgage payment, including property taxes, homeowners insurance, moving expenses, maintenance, repairs, and more.
Paying off your personal loan before signing a mortgage can free up more of your income to be dedicated to these new expenses and make it less likely that you would fall behind.
Many people have personal loans and mortgages, but when applying for a mortgage, it might make sense to pay off your personal loan to free up some of your income. It can also boost your credit score and reduce your debt-to-income ratio, making it easier to qualify for a mortgage and secure a better rate.
If you need a personal loan, you can check your rate at Uprova.com without impacting your FICO credit score.