Will Debt Consolidation Help You Get Approved for a Mortgage?

by Gary Foreman

Consolidate Debts before Applying for Mortgage photo

It can be easier to get approved for a mortgage if you consolidate other debts before applying, but it might not be the best financial move. Read on to find out how to compare your options.

Dear Gary,
I want to buy a home. I currently have several personal loans. I want to get a new personal loan that would combine the current loans and pay just one bank. The interest rate would be 7%. That’s about 2% higher than the loans I currently have. I have good credit, and in the past year, I was pre-qualified to purchase a home. Does it make sense to combine these loans to free up income to purchase a home? Will debt consolidation help me get approved for a mortgage?
Laurie

Will debt consolidation help you get approved for a mortgage?

That’s a good question. Getting your financial affairs in order before you begin to seriously shop for a mortgage is a good idea. To do that, not only is it wise to know your credit score, but it’s also wise to know what you can afford in mortgage payments and other home upkeep expenses before you make any decisions. Let’s look at both.

Will debt consolidation help your credit score?

First, let’s consider your current loans and their effect on your credit score. Consolidating your personal loans into a new loan will not help your score. How many loans you have isn’t important. How much you owe and whether you’re consistently on time with your payments is important.

Since you have a good credit score, I’ll assume you’re good about making your payments. Your best strategy is to continue that and, if possible, add extra to reduce the amount of the loan that’s outstanding. Even if it’s only for a few months, you’d be surprised how quickly you can reduce the loan amount by adding to your monthly payment.

Will debt consolidation lower your monthly debt obligation?

Next, would combining the loans make it easier to handle mortgage payments? Mostly likely, it wouldn’t.

Your current loans are one of two types. In one type, your regular payments just cover the interest due each period and the entire amount of principal is due in a lump sum at the end of the loan.

In the other type, each payment is for the interest due and a portion of the principal. At the end of the loan, the principal has been repaid and you don’t owe anything further.

You’ve said that the interest rate will actually increase by about 2%, so that portion of the loan gets more expensive.

Unless you’re currently paying part of the principal with each payment and you opt for a new loan that delays that to the end of the loan, your payment couldn’t go down. And, if you chose that type of loan, you’d be adding quite a bit to the total interest that you’ll pay over the life of the loan.

How much home can you afford?

Finally, how much home can you afford? You’re about to make a major commitment. Although foreclosure rates have been on the decline the past 10 years, you don’t want to join those who have lost their home!

Part of the reason that many people fall behind is that they fail to realize that they’re responsible for more than just the mortgage payment. They also have to find the money for property taxes, insurance, repairs, and upkeep on their home.

You should be able to get estimates for property taxes and insurance from the real estate agent or with a little research. Some mortgages will require that you pay a portion each month with your mortgage payment.

It will be harder to estimate repairs and upkeep. Depending on the age and condition of your home, it could range between 1% and 5% per year.

Most families find that they can afford to spend up to 35% of their after-tax take home pay on all housing related expenses including the mortgage. Anything over that will strain your overall budget.

It sounds as if you’re doing the proper things prior to beginning a house hunt. Hope that the one you find is your dream home!

Reviewed August 2020

About the Author

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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