When you apply for a mortgage, any debts you have – auto loans, credit cards and personal loans – may affect the size of the loan and the eligibility for a home loan.
When lenders are considering your mortgage loan application, the first consideration is not necessary your credit score or a down payment, but can you afford the mortgage payment. To that end, your monthly payments on any non-mortgage debt are a vital piece of the puzzle.
How a Personal Loan Can Affect Your Mortgage Application
Personal loans can affect your mortgage application in several ways.
Having a loan affects your credit rating. The biggest impact is your payment history. Making all of your monthly payments on time has a positive impact on your FICO® score. To a lesser extent, your credit score benefits from the variety of types of credit products you have (called the credit mix). A personal loan is an installment loan that is different from a revolving loan (credit cards). Plus, your credit score should improve with age. Having very old accounts of any type can improve your score.
The payment history of your personal loan can directly affect your mortgage application. Some mortgage lenders will reject your application, for example if you have two payments late in the past six months or one account 90 days late, regardless of your credit rating.
DTI stands for Debt to Income Ratio. These are your debts divided by your income. The more debt you have, the less housing costs you can afford.
Mortgage underwriting standards vary by bank and program, and each mortgage lender has a process for assessing your external DTI and internal DTI. You must satisfy both.
External DTI is the percentage of your monthly gross income that you spend on housing costs. The best scenario is to keep this number below 28%.
Domestic DTI is the percentage of your monthly income that you spend on housing costs. a plus all debts combined. Each lender sets its own DTI limits and 43% is considered the optimal internal ratio limit. Most lenders allow 45% or more for at least some types of mortgages.
To calculate your DTI and the mortgage payment you are entitled to, your lender receives your credit report from each of the three major credit agencies (Equifax, Experian, and TransUnion). They use these reports to compare your monthly debt obligations to all the income you can (and want) to document. The underwriter believes:
- Minimum payment on credit card account
- The amount of the monthly payment for any car loans
- Whether you pay child support or child support
- Any liens or judgments against you
- Monthly payment for each individual loan
- Any other financial obligations
The lender makes No consider monthly bills that are not debt, even if you have a contract with a service provider (phone bill, utilities, products, subscription, etc.).
The DTI is somewhat fluid in relation to other parts of your mortgage application. Typically, your application is built on three pillars: your credit score, your DTI, and your down payment. If you do well in two of them, the lender can be more flexible with the third.
How to calculate DTI based on your personal loan
Your housing costs include your monthly payments for principal, interest, taxes, and insurance, and homeowners association contributions, if applicable (collectively known as “PITIA”).
If your annual household income is $ 60,000 per year, your monthly gross income is $ 5,000. You can meet the pre-DTI limit for a regular mortgage with a total monthly payment for housing (PITIA) up to $ 1,400 per month ($ 5,000 x 28% = $ 1,400).
To meet the internal limit, you will also have to spend less than 43% of your gross income on all of your debts. At $ 5,000 a month, you can spend up to $ 2,150 on your monthly debts, including your rent.