If you are looking to get a personal loan before applying for a mortgage, this article should be a valuable one for you. For starters, here is the actual definition of a personal loan. It is an outlay that is made for a specific purpose, rather than as collateral for a secured loan. It is mostly used for the purchase of a home.

A mortgage is a type of loan, but instead of taking it in case, you take it to buy a house. It is indirectly a personal loan because you can take that personal loan and use it to pay for the mortgage. But the question here is, what if you already have taken a personal loan that has not been paid off yet. Should you pay it off first? This article will discuss just that. Firstly, the article will go over the mortgage types, followed by a discussion on whether to pay the personal loan before applying for a mortgage.  

Mortgage Types 

But first, let’s go over some types of mortgages. There is a fixed rate one, where the interest rate is permanent, and the mortgage lasts for up to 30 years. So you can apply for that if you prefer smaller monthly payments. This is a low-risk loan. Another type is Adjustable Rate Mortgage, to avoid the jargon, it means that the lender will mark the interest based on the market. If it increases, he or she will increase the rate. And if it decreases, he or she will decrease the rate. It floats with the other interest rates.  

Have you ever seen the movie ‘Up’, where a guy puts balloons on his house to make it fly? Ironically, there is a type of mortgage called Balloon Mortgage. The rate for the mortgage will start on the ground and then fly up, keep increasing, until it becomes a whole amount to pay before the loan ends. It is very risky, just like the house with the balloons. The only way to put yourself in such a risky loan is to be certain that you will have that load of money when the mortgage payment date arrives.  

Paying Personal Loan 

Borrowing from InstantLoan comes with several benefits. It is a fixed amount of money, with a fixed interest, and a long time to be repaid. It can be used for a variety of expenses, one of them is a mortgage.  

It is not necessarily better to pay the personal loan before a mortgage. There are many factors to consider.  

Let’s first discuss why it is not important or why it would not make much of a difference. Firstly, paying off the personal loan does not improve the credit score every time, it is only when you pay the loans on time.   

Only then credit scores increase. It may delay the purchase of the house. Because you can pay some of the mortgages with the amount of money you currently have (that you wish to pay the personal loan with).  

But paying off the loan can improve the debt-to-income ratio. Meaning, the income you set aside to pay the loan, if you don’t have a loan to pay, you get to keep that income. Lenders, usually, don’t give mortgage loans if the ratio exceeds 43%. So before applying for a mortgage, you should review the debt-to-income ratio.  

If you are buying a house for the first time, it is better to apply for an FHA loan. The credit scores range from as low as 550, with a down payment of 3.5%. It is monitored by the government, but FHA-lenders are the ones who give out the loan. 

For the veterans, and those in military services, your best option is VA mortgage, or Veteran Affairs mortgage. It rarely requires a down payment from the lender as it is controlled by the government. So the lenders feel relaxed when giving the money.  

How To Calculate Debt-To-Income Ratio: 

And here is how to calculate it: 

You divide monthly payments, such as loans, school fees, car expenses, over the total monthly income. 

If it exceeds 43%, then you should pay the personal loan before applying for a mortgage. If it does not exceed it, then you should look at other expenses for the house as well. Such expenses are plumbing, decorating, wall painting, basement modifications. You should also consider the down payment for the house, some lenders require from 3 to 20%. So if you pay the loan, will you have enough money for the down payment?  


So should you pay the personal loan before applying for a mortgage? The short answer is, it depends. It depends on how long the mortgage is, how much the down payment and other expenses are. It also depends on the debt-to-income ratio. It depends on your credit score. You’re in a better position in front of the lender if your credit score is 620+. It depends on your financial position. It depends on how much money you have how much money you owe. It depends whether you pay the debts on time or not. You should consider the types of mortgages before applying to one of them. 

There is a fixed-rate mortgage, Adjustable Rate Mortgage, balloon mortgage, FHA mortgage, and VA mortgage. The fixed-rate is a long term mortgage. The Adjustable Rate Mortgage, where the interest fluctuates on the benchmark. The Balloon Mortgage increases the interest rate to a wholesome before finishing the loan. It is the highest risk. FHA Mortgage makes it a bit easier to apply for a mortgage, with a low credit score. Finally, the VA Mortgage is for returning veterans, and their spouses, which are monitored by the government. The lenders feel more comfortable giving a loan without a down payment.