Here’s What Happens When You Apply for Another Loan While in the Process of Closing on Your Mortgage

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It’s best to avoid taking on new debt until your mortgage closes. Read on to see why. 

You may be looking at several different expenses when buying a home. Not only is there your mortgage, but you may need to apply for a personal loan to finance your furniture purchases so you can function in the home you’re buying.

There’s nothing wrong with applying for a personal loan, or another type of loan, to furnish or improve your home after you close on your mortgage — provided you can afford those additional loan payments, of course. But it’s a good idea to hold off on applying for a new loan while you’re in the process of closing on your mortgage for a few big reasons.

You don’t want to compromise your mortgage

Experian says that opening a line of credit or signing a loan during the mortgage application process could cause mortgage lenders to view you as a riskier borrower. From there, a couple of things can happen.

Your mortgage closing could get delayed as your lender delves deeper into your finances to make sure it’s not taking on too much risk. Or, it might pull your mortgage offer after determining that your new loan application does, indeed, make you too risky a candidate.

Plus, any time you apply for a new loan, it results in a hard inquiry on your credit report. In many cases, this will only result in a modest dip in your credit score. However, it takes a minimum credit score of 620 to qualify for a conventional mortgage.

If you’re starting out with a credit score of 625 and your score drops by 10 points following a loan application, that could put you below the threshold of being able to qualify for a conventional home loan. The result? Bye bye, mortgage.

But let’s say you’re still able to finalize your mortgage despite a credit score drop. What might happen instead is that you get stuck with a less favorable rate on your mortgage due to that credit score dip. The result? More expensive monthly payments.

It’s best to wait

It’s easy to see why you might feel compelled to sign a loan while you’re in the process of closing on a mortgage. Maybe you want to order furniture for your new place before you’re ready to move in, not after. Or maybe you want to put a loan in place so you’re able to tackle renovations right away.

But you should know that applying for a loan before your mortgage closes could put that home loan at risk. So it’s best to wait until after you’ve closed on your mortgage to apply for financing.

Once you have the keys to your home in hand and your mortgage loan has been finalized, you’ll still need to be careful about taking on new expenses. After all, you’re now paying a mortgage on top of the bills you had before buying a home. Borrowing elsewhere could mean running the risk of not being able to keep up with your various payments.

But if your mortgage has closed, a new loan application shortly thereafter won’t compromise it, because that home loan will already be in place. So from there, you’re free to borrow as you want to, provided you’ve run the numbers and are absolutely certain you can afford to keep up with a mortgage plus another loan payment (or more).

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