Will Personal Loan Affect My Mortgage Application?
While Personal Loan is a completely different financial product from a mortgage, an existing loan can always hurt your new loan application. Each of your financial moves has a bearing on your loan eligibility.
As a part of the standard procedure to determine your eligibility for a Home Loan, the lender will check your Credit Score along with your borrowing/repayment history. This helps them determine your credit eligibility and repayment capacity. Any of the running loans such as Personal Loan or Credit Card will make your credit history.
There are many factors that affect your eligibility when you Apply for Home Loan.
When Personal Loan affects your Home Loan application positively
For lenders, it is not always bad news if you have an active Personal Loan account. It offers them a better opportunity to understand your behaviour as a borrower and how safe it would be to offer you a substantial amount as a Home Loan.
Here are some ways in which a Personal Loan can affect your mortgage application positively:
If you have a good repayment track record for your loan, i.e., no EMI defaults and timely repayments, the lender will regard you as a financially disciplined person. It showcases your seriousness as a borrower and indicates that their money would be safe.
Repaying Personal Loan EMIs on time will reflect positively on your Credit Score and build a good credit history. Financial institutions are more likely to offer Home Loans to borrowers with an active and positive credit history.
When you have a good repayment track record for multiple loans & credit products, you are in a better position to negotiate with the lenders. Moreover, as you have a good credit score, you are eligible for a lower Home Loan Interest Rate and extended repayment tenor.
You can use the money you have borrowed as a Personal Loan to consolidate your Credit Card bills and other high-interest loans. This will give an incredible push to your Credit Score.
When Personal Loan affects your Home Loan application negatively
With Personal Loans, it is very easy for the things to go out of hand. There are instances when a Personal Loan can affect your mortgage application negatively, such as:
Poor credit score:
If you have multiple Personal Loan accounts but are unable to pay the EMIs regularly or you default on any of these EMIs, your credit score will be impacted negatively. This will take many months to recover, jeopardising your Home Loan application.
Debt to income ratio:
A Personal Loan will have a direct impact on your debt-to-income ratio. It is an important financial ratio that helps the lender determine the portion of your income that is going towards EMI payments. If the debt-to-income ratio goes over 30%, the chances for Home Loan approval reduce.
Exposure to high-interest credit:
If you have availed one or multiple Personal Loans at high-interest rates, it exposes your dependence on credit. This might put some doubts in the mind of lenders.
Higher interest rates:
If you have availed Multiple Personal Loans and are struggling to make the repayments, you might still get a Home Loan. But the Home Loan interest rates offered to you will be significantly higher.
Every time you apply for credit, the lender would initiate a hard query to the credit bureau. These hard queries are recorded in your credit information report. Too many hard queries can raise a red flag for the lenders.
How to improve your eligibility for Home Loan?
Applying for a Home Loan requires a lot of planning and proper execution. You must start your preparation to apply for a Home Loan for at least two years in advance.
Here are some tips to help you improve your eligibility for a Home Loan when you have an active personal loan account:
Repay EMIs on time:
You must repay all of your EMIs and Credit Card bills on time. This will help you improve your Credit Score and save you from penal charges. Moreover, it will help prove your credentials as a responsible borrower.
Maintain a steady bank balance:
Always maintain a steady bank balance in your account. The older the balance is, the better it is for your Home Loan eligibility. Moreover, always set-up ECS or direct debit facility for Personal Loan EMIs and Credit Card bills.
Settle Credit Card dues:
You should settle your Credit Card bills in full before you apply for a Home Loan. This will give a big boost to your credit profile and reduce your exposure to high-interest credit.
Pay-off your Personal Loan accounts:
It is advisable to pay off your Personal Loan account in full before applying for a Home Loan. It will boost your eligibility for a mortgage significantly.
Keep a watch on your credit report:
Credit reports are prepared by software as per the pre-defined algorithm. There might be some error on the part of a financial institution. So, keep a close watch on your credit report and raise a dispute as soon as you spot an error.
Maintain a stable job profile:
You should refrain from changing jobs before you apply for a Home Loan. Lenders want you to have a stable employment history. So, unless it is due to a better profile or higher salary package, avoid job-hopping.
Though availing a Personal Loan can come in handy during times of financial problems, but it surely can have an impact on your Home Loan eligibility. Exercise financial discipline and turn this impact into a positive one with the above mentioned useful tips.
Also Read: Best Home Loan Providers in India
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