Getting a personal loan before buying a house

In this brief guide, we are going to discuss “getting a personal loan before buying a house “.

You may be considering getting a personal loan to pay for other obligations which you have or maybe to buy a car, cover your rent or for whatever reason.

If you are considering getting a personal loan before buying a house then you may want to know what the implications may be for your mortgage (if you are using a mortgage to buy a house).

If you are not using a mortgage to buy a house then getting a personal loan before buying a house may not have much effect on you.

This guide focuses on those who intend to seek a mortgage with which they will purchase their house but also want to get a personal loan before they buy the house.

What to consider when getting a personal loan before buying a house:

Two main factors which will affect by how much a personal loan affects your ability to get a suitable mortgage to buy a house include the size of the personal loan and how long ago you took out the personal loan.

If you took out the personal loan a few months before you seek to get a mortgage for your house purchase then you may find that it has little significance on your ability to buy a house and may only serve to show that you can repay your debts on time (if you did).

Naturally, a personal loan which has a high outstanding balance and high monthly repayments will affect your ability to repay your mortgage and will also have some significance on if you are able to buy a house.

Some of the other considerations when getting a personal loan before buying a house include:

Your credit score could fall

When you apply for new credit your credit score momentarily falls due to the hard credit search carried out on your credit profile.

This usually only lasts a few months but this could be a significant fall which makes you look less creditworthy in the eyes of the mortgage lender.

If you miss any repayments on the personal loan then this could also damage your credit score and affect your ability to get a mortgage.

On the other hand, if you have shown good credit behaviour and have managed your personal loan well then this could improve your mortgage affordability.

You should consider this before getting a loan if you are planning to buy a house.

Tips to build your credit score:

• Keep your credit utilization below 30%
• Avoid being rejected for credit
• Avoid making too many credit applications within a short time
• Get a credit builder card or loan t show good credit repayment behaviour
• Keep your active credit accounts open as long as possible
• Get on the electoral roll
• Avoid missing credit repayments

Your debt to income ratio may rise

Another thing you may want to consider is that your debt to income ratio may rise and this will mean that most mortgage lenders may not even accept your mortgage application as most mortgage lenders may have a debt to income ratio caps and will not lend to borrowers who have a debt to income ratio above that cap.

An increased debt to income ratio may also make it much harder for you to get a mortgage from most mortgage lenders and consequently reduce the pool of mortgage lenders who may be available to you.

To calculate your debt to income ratio you should add up your total monthly debts and divide this by your total gross income. The answer is your debt to income ratio.

You can multiply this answer by 100 to give you a percentile.

Your mortgage affordability may fall

Your mortgage affordability could fall due to the fact that you now have more debts to pay and hence less monthly disposable income to put towards paying your mortgage each month.

This could mean your monthly mortgage repayments could end up costing you much more than it could due to your mortgage affordability falling.

This could, in theory, reduce how much you are able to borrow for a mortgage and leave you needing to out down a bigger mortgage deposit than you may have first intended.

Potential mortgage lenders may fall

You may notice that the number of mortgage lenders who you are able to apply to has fallen and this could be due to the fact that most mortgage lenders may prefer to lend to borrowers who have not recently taken out a personal loan. 

This would also mean that the mortgage offers and subsequent mortgage rates you receive are not competitive and may even be unaffordable given all your current debt.

How to increase your chances of getting a mortgage?

There are various ways you can use to increase your chances of getting a mortgage, they include:

Paying off your debts

Paying off your debts may help you increase your mortgage affordability and hence the likelihood that you will be able to get a suitable mortgage to buy a house even after taking out a personal loan.

Refinance your debts

You may also be able to refinance your debts in order for you to reduce your monthly repayments on your debts and hence reduce your debt to income ratio.

You could refinance your debts by taking out a personal loan or more commonly what is referred to as a debt consolidation loan.

Use a Government scheme

Government schemes help you reduce the amount of mortgage deposit you may need to put down, reduce the price of the property or create a structure that increases your mortgage affordability much sooner than it would have been.

Some of these include first-time buyer government schemes whilst others in this list are accessible to you even if you are not a first-time buyer.

Government schemes are not available to you if you are getting a buy to let mortgage.

The Government schemes include:

• Lifetime ISA– gives you a government bonus of £1,000 if you save a maximum £4,000 a year.
• Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
• Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
• Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
• Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
• Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
• Right to buy– allows you to buy your home at a discount price.
• Preserved right to buy– same as above.
• Right to acquire– similar to the above.

Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.

Use a mortgage broker for your mortgage in principle

You may want to use an independent mortgage broker to help you get a mortgage on your new home.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.

This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. 

This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.

It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.

They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.

This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.

In this brief guide, we discussed “getting a personal loan before buying a house “.

If you have any questions or comments please let us know.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.