Q: I have a friend that is getting ready to go into real estate. He wants to know if he takes out a small personal loan, what impact will it have on his ability to take out future loans on property he wishes to buy?
A: Any time you take out a loan, whether it is personal, credit card, school, auto, or a mortgage, it lowers the total amount you can borrow to buy real estate in the future.
Mortgage lenders take a look at your monthly debt service — that is, how much you spend each month to keep all of your loans afloat — and subtract that number from the total amount you have available to pay your total debt service.
So if you’re spending $500 per month on your debt service, and your income will allow you to spend $1,500 on your total debt (including a mortgage, real estate taxes and insurance), you’ll only be able to spend $1,000 on a conventional loan. If you want to increase that amount, you’ll either have to look at some riskier loan programs (like interest-only or option ARM loans) or consider going with a high loan-to-value ratio FHA mortgage.