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How Does Debt Consolidation Affect Buying a House?

If you’re considering a mortgage, you might be wondering, “Does debt consolidation affect buying a house?” Buying a home is one of the biggest financial decisions you'll ever make—and it requires your finances to be in solid shape. If you carry multiple debts, debt consolidation can improve your financial standing. However, it must be done strategically to ensure the best outcome.

What is Debit Consolidation

Debt consolidation combines multiple forms of debt into a single monthly payment. It can offer a lower overall interest rate and faster debt payoff. Consolidating debt can also help you keep your finances organized. It allows you to track fewer interest rates and accounts, giving you a clear visual of where your debts stand.

If you’re a step away from falling behind on bills, debt consolidation may be a helpful strategy to simplify your approach to payments. Whether it’s from student loans, auto payments, medical services, or credit card spending, there are many reasons you could be stuck with high payments that feel defeating. Before buying a house and taking on new debt, it’s best to get rid of old debt to make leeway for mortgage payments.

So, how does debt consolidation affect buying a house? It can help by improving your ability to buy a home. Namely, by improving your credit score and debt-to-income (DTI) ratio.

How to Consolidate Debt

A personal loan is a common method of consolidating debt. It is a lump-sum loan and does not require collateral for security. It provides one-time funding to cover your debts with the same monthly payment amount. With a personal loan for debt consolidation, you can save money on higher-rate interest with a lower-rate loan. With MIT Federal Credit Union, you can get a personal loan without processing or service fees and no pre-payment penalty.

If your current monthly payments are better than the rate from a single loan, you’re better off staying put. Additionally, if your debt is more than half your income, debt relief might be the better option.

Another option for debt consolidation is to refinance any outstanding loans, such as auto or student loans. Refinancing these loans involves replacing your current loan with a lower interest rate or a different repayment period. By refinancing your auto loan, for example, you can pay off an existing loan earlier. Check to see if interest rates have dropped since you took out your original auto loan.

How Debt Consolidation Can Help You Get a Mortgage

So, how does debt consolidation affect buying a house? Firstly, it can improve your credit score, which influences the interest rates and terms you may qualify for. A higher credit score reflects a higher ability to repay a loan and may make you eligible for lower interest rates. Besides consolidating debt, there are other ways to improve your credit score before you buy a house.

Secondly, it can improve your debt-to-income (DTI) ratio. Your DTI ratio is a key factor that mortgage lenders consider when reviewing your application. It is shown as a percentage and calculated by comparing how much money you owe and earn each month. According to the Consumer Financial Protection Bureau, 43% is typically the highest ratio allowed to qualify for a mortgage. While a 43% ratio may result in approval for a mortgage, the odds for approval will increase if the ratio is even lower. Generally, a DTI ratio of less than 35% is ideal.

How Debt Consolidation Can Hurt You When Getting a Mortgage

It is worth noting that an application for a personal or debt consolidation loan can lead to a hard inquiry on your credit report. This will lower your credit score, but only temporarily. Over time, you can improve your credit score by making consistent, on-time payments on your new loan. The timing of your debt consolidation is important. Getting your debt consolidation loan well before your mortgage application is best.

Additionally, some consolidation loans may stretch out repayment over a longer term. While this may relieve stress in the short term by lowering your monthly payment, it increases your total debt. This will negatively impact your debt-to-income ratio. So, does debt consolidation affect buying a house negatively? Yes, it can if it is not done optimally.

Take the Next Step Towards Buying a House

If you’re ready to take the first step toward owning your home, our team is here to help. At MIT Federal Credit Union, we've built our online mortgage process so that you can easily handle the whole thing yourself, 100% digitally. If you need more help, feel free to contact one of our team members. We are here when you need us!

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