Why You Should Avoid Taking Out Other Loans When Buying a Home
Buying a home is one of the biggest financial commitments you'll ever make. It requires careful planning, budgeting, and financial stability to ensure a smooth purchasing process. One critical mistake many homebuyers make is taking out additional loans—such as car loans, personal loans, or credit card debt—while in the process of securing a mortgage. Doing so can have serious consequences that may jeopardize your ability to buy a home or increase your overall financial burden. Here’s why you should avoid taking on any new debt during the home-buying process.
1. It Can Affect Your Debt-to-Income (DTI) Ratio
Lenders assess your ability to repay a mortgage by evaluating your debt-to-income (DTI) ratio, which is the percentage of your monthly income that goes toward debt payments. Taking out additional loans increases your DTI ratio, making you a riskier borrower in the eyes of lenders. If your DTI ratio exceeds acceptable limits, you may qualify for a smaller mortgage or even get denied altogether. I recently had a client that took out a loan for their closing costs and did not tell anyone, when the lender did a soft credit check right before closing it inevitably made the client ineligible for the home loan!!
2. It Can Lower Your Credit Score
When you apply for a new loan, lenders perform a hard inquiry on your credit report, which can temporarily lower your credit score. Additionally, new loans increase your overall debt load and may impact factors like credit utilization and account age, both of which affect your credit score. A lower credit score can result in higher mortgage interest rates or, in worst-case scenarios, disqualify you from getting a loan altogether.
It is VERY IMPORTANT that you communicate honestly with both your lender and agent throughout then entire process! Together, we will guide you through the transaction to ensure it goes as smoothly as possible.