How Debt Consolidation Affects Buying a Home

Know your chances of qualifying for a mortgage
Last updated Sep 10, 2020 | By Lauren Stewart

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Buying a home is a dream come true for many people, but reaching that goal with a mountain of debt standing in your way can be challenging.

If you have debt that might hinder your ability to qualify for a mortgage, a real estate agent may recommend consolidating your debt to help you look better on paper to the mortgage lender.

But how does debt consolidation really affect your chances of homeownership? And, does it matter if you’re a first-time buyer?

Here’s how the most common methods of debt consolidation can affect your homebuying process.

Consolidating With Personal Loans

Taking out a personal loan to combine your existing loans into one is a common strategy used to get out of debt. And, if making a single monthly payment makes it easier for you to stay on track with consistent payments, then it could be a good option for you to consider.

It could also help you qualify for a mortgage. You may not qualify right away, but if can be one of the first steps in getting there.

Mortgage lenders look at your debt-to-income ratio, or DTI, when qualifying you for a mortgage. So, by consolidating your debt, you help reduce your DTI ratio quickly because you’ve diminished the chances of making a late payment or missing it altogether.

After you’ve consolidated the debt and increased your DTI ratio, establish a “reliable borrower” track record by making consistent payments on time.

How It Impacts Your Credit Score

Using a personal loan to consolidate your debt isn’t likely to have a negative or long-lasting impact on your credit score. You may notice a slight dip at the start since applying for a loan requires a hard inquiry on your credit, but should experience no problems bouncing back quickly by staying on top of your payment schedule. When you're brainstorming how to pay off debt, this is a viable solution.

Consolidating With Credit Cards

Consolidating debt with the help of a balance transfer credit card is another common way to combine loans. By transferring outstanding balances to a new credit card with a low or 0% introductory APR, you’re essentially buying yourself a window of time to pay down your debt without accumulating additional interest.

Similar to taking out a personal loan to help pay off debt, you’ll want to continue making at least the minimum payments to decrease your debt-to-income ratio.

How It Impacts Your Credit Score

Using a balance transfer card to pay off outstanding debt can actually improve your credit score if done right. It opens up your credit availability which has a positive impact on credit. However, if you close the cards you now have “paid off,” that could negatively impact your score. You’ll want to keep the cards open and make sure you’re not racking up a balance on them again.

Consolidating With a Debt Relief Company

Consolidating with personal loans and balance transfer cards may be viable options if you’re able to swing payments on your own, but if your financial situation needs additional help or assistance, partnering with a debt consolidation company, or debt relief company might be the right choice for you.

Before making a decision, be sure to understand how debt consolidation works and what you can expect the process to entail. Reading the fine print in this situation is your friend.

Also worthwhile is learning how working with these types of companies can impact your chances of purchasing a home — especially if you’re a first-time homebuyer.

A DMP is essentially a program that consolidates your debt for you. You then pay the company directly each month and they make payments on your behalf to your lenders.

Enrolling in a DMP doesn’t prevent you from trying to qualify for a mortgage but it can be a factor. Besides, if you’re already enrolled in a DMP, chances are you may not be in the best shape financially to be purchasing a new home.

How It Impacts Your Credit Score

While you’re in the DMP, your credit should not be affected too much if it’s affected at all. By the end, your financial health will be in a much better place, and you’ll be ready to apply for a mortgage and get the keys to your new home.

Overall Impact of Debt Consolidation on Your Credit

It’s normal to wonder how consolidation can impact your credit. The Truth is, it can both help improve and hurt your credit depending on the strategy you choose and if you’re able to stick to the payment schedule. The most important thing is remember is to consistently make payments toward paying down your debt. Other factors aside, showing your creditors you’re responsible enough to pay down debt owed is a great step toward improving or maintaining your credit.

How About Medical Bills? Does That Effect Buying a House?

Unpaid medical bills can also be another hindrance when it comes to buying a home. Thankfully, with the flexibility of different debt consolidation options, you won’t have to squash your dreams of owning a home someday. Similar to other forms of debt, the most important factor is making a repayment plan and establishing that you are a responsible borrower to the lender. This can increase your chances of qualifying for a home loan.

The Bottom Line

So, should you consolidate to increase the chances of buying a home?

Consolidating your loans can quickly help you make progress toward becoming debt free but as with most things, there are pros and cons of doing so.

If homeownership is your next big goal, and you can commit to making payments on a regular schedule, consolidating loans could be a good option for you. 

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