The purchase of a home is one of the greatest financial achievements in life. However, if you already have debts on credit card, loans, or other debts, then you may be curious whether debt consolidation is going to help or hurt your likelihood of getting a mortgage. The fact is that debt consolidation may either affect your capacity to purchase a home either negatively or positively, depending on how you do it and when.
The connection between debt consolidation and home purchase is one thing that can be understood to make you make good financial decisions prior to applying to be a mortgage holder. We shall discuss its functionality, what the lenders are seeking and how you can prepare to increase your chances of being approved.
What Is Debt Consolidation?
Debt consolidation refers to an act of pooling various debts (credit cards, personal loans or medical bills) into a single loan or payment. The primary objective is to make the repayment easier and preferably get a low interest. Some of the frequent methods of consolidating debt are through taking a personal loan, a balance transfer credit card or a home equity loan.
Through pooling of various debts, borrowers would find it easy to control their financial status and concentrate on paying a loan rather than moving between several dates of payment. But with the debt consolidation, as it alters your credit history in general, you should know how it impacts your mortgage application.
The impact of Debt Consolidation on your Credit Score
One of the most important factors that the lenders consider in giving a mortgage is your credit score. The consolidation of your debts may and may not positively affect your credit, but it all depends on the timing and the type of debts consolidation you may opt to go through.
When you submit a loan request to consolidate your loans, the loan provider conducts a hard credit check, which temporarily demeans your credit score allotment. Another factor that can affect your score is that opening a new credit account can also lower your average account age.
Nonetheless, as soon as you start to pay off regularly and on time to your consolidated loan, your rating can begin to increase gradually. The reason is that history of payments and less use of credit (what percentage of available credit you are using) constitute a big part of your score.
As long as you use your consolidated loan in a responsible way, it will not take long to get your credit score back, not to mention the fact that it might even be even better than before.
Debt Consolidation – Can You Qualify to Buy a Mortgage?
Yes – debt consolidation may allow you to get a mortgage provided that it is utilized in a strategic manner. Mortgage lenders scrutinize very hard your debt-to-income (DTI) ratio, which is a ratio of debt payments that you make monthly to your gross monthly income. A low DTI indicates that you will be able to afford as well as deal with other financial commitments, like a mortgage.
Your DTI ratio can also be improved by combining high-interest debts into a single manageable loan at a reduced monthly payment, which will make you attractive to lenders. It is also financially disciplined – a major aspect that the lenders consider when evaluating those who want to be lent money.
But timing is everything. When you commit to consolidating immediately before submitting a mortgage application, your credit report will indicate a new loan account, which will temporarily put off lenders. Preferably, you ought to bring together and normalize your finances, at least half a year prior to making an application of a home loan.
When Debt Consolidation Might Hurt Your Chances?
Consolidation of debt is not always good in the short run. You may end up in new debt immediately before you are about to secure a mortgage and this may make the lenders raise eyebrows. They might perceive it as an indication that you are having difficulties with handling the current commitments.
Also, your new consolidation loan will add to your overall debt, and when you make any defaults it might hurt your credit score and DTI ratio. The lenders may become convinced that you heavily depend on borrowed money because you utilize high rates or continue to apply new credits frequently.
In a nutshell therefore although it is true that debt consolidation may raise your financial profile in the long run, bad timing or default may cause an interim reduction in your mortgage approval rates.
Best Time to Consolidate Before Buying a Home
It is always a good idea to settle debt long before you are planning to purchase a house. This will allow your credit score to rebuild and show it is financially responsible. An objective of paying off your consolidated loan on a regular basis over a few months should be made before you submit your mortgage application.
Also, you do not want to acquire new debts at this time like automobile loans or a new credit card because every more loan you take on, the higher your DTI will be and limit your ability to repay the mortgage.
It is also good to have a look at your credit report and see any discrepancies and check your score monthly. The difference in interest rate you can get can be big even by small points.
The Lender Perceptions towards Debt Consolidation
Debt consolidation is not necessarily looked upon as a bad thing by mortgage lenders. Most people in fact value borrowers who are prolific in managing their debts and making efforts to make the repayment process easier. Consistency is most important to the lenders, to pay on time and to maintain a low amount of debt in comparison with your income.
They also look at your general financial status such as stability of income, employment history and savings. Therefore, in case consolidation will assist you to be in charge of your money once again, and prove yourself to be trustworthy, it might have a positive effect on your mortgage submission.
Alternative to Debt Consolidation Before Buying of a Home.
In case you doubt whether or not debt consolidation is the right process to take before purchasing a home or not, then consider an alternative. The first solution is to develop a debt snowball project, in which you will first pay off smaller debts so that you can gain momentum. The other method is the debt avalanche method whereby giving priority to high-interest balances will help save more in the long run.
It was also possible to bargain with creditors to receive lower interest rates or moving high-interest balances to a card with 0 introductory APR. Both of these plans may lower your DTI ratio and will make you mortgage ready without getting another loan.
Conclusion
The debt consolidation may have an impact on you being able to purchase a house not necessarily in the negative. It may in fact enhance your credit profile and reduce the debt-to-income ratio and make you a more attractive borrower, should you do it early and responsibly.
But when done too near your date of applying to a mortgage, it may temporarily damage your credit or bring warning to lenders. Preparation is the key, you have to plan your consolidation strategy several months ahead, ensure that you are up to date on the payments and have to ensure that you are using your credit sparingly.
After all, it is not just a mechanism of making debt easier; it is a step towards the establishment of financial stability, which every homeowner must have.
It may make your score go down a little at the beginning because of a tough inquiry but it generally gets better with time as you continue to make regular payments.
Wait at least six months to a year in order to have your credit regain its strength and demonstrate a good record of paying back.
Yes, but the lenders might carefully examine your finances. When the payments are always consistent, this assists in gaining trust.
No, it puts several debts together, you still owe the balance, however, it is easier to pay in one installment and less interest is charged.
