At a Glance

Unless you’re a wealthy investor, you’re probably not buying a home in cash. And taking out a mortgage when you’re already swimming in debt can be intimidating. If that’s the case, you might want to try to reduce your debt as much as possible before making the leap into home ownership. Turning to debt consolidation could be a good idea, but it’s worth considering how that might affect your next step and long-term goals.

  • How does a debt consolidation loan affect getting a mortgage?
  • Can I consolidate debt before applying for a mortgage?

 

Debt consolidation is one way to try to pay off your debt more quickly and ultimately save money on interest over time. But does debt consolidation affect buying a home?

How does debt consolidation affect buying a home?

Depending on when you consolidate debt in relation to your search for a new home, debt consolidation can have advantages or disadvantages. Basically, timing is everything. Here’s a look at the pros and cons of debt consolidation’s effect on home buying.

Pros

Can improve credit score long-term

Debt consolidation can help you reduce your overall debt and make it easier to pay your bills on time with a single monthly payment, both of which are important factors in determining your credit score.

Increase chances of getting approved with a good rate

The better your credit score, the more likely you are to get approved for a good interest rate when shopping for a mortgage. To get approved for a conventional home loan, you typically need a minimum FICO score of 620.

Your debt-to-income ratio—or the amount you owe compared to the amount you make—also can affect your ability to get approved for a mortgage, so minimizing the amount of debt you owe also can be a big help. To get a Qualified Mortgage, the highest debt-to-income ratio you can have is 43%, according to the Consumer Financial Protection Bureau.

Cons

Creates hard credit inquiry

Taking out a debt consolidation loan or applying for a balance transfer credit card will lead to a hard credit inquiry, which will temporarily cause a slight dip in your credit score. Any hit to your credit score can make it more difficult to qualify for a mortgage or get a good rate.

Can increase amount owed

While the goal of debt consolidation is to decrease the amount you owe, it’s important to be mindful of the fees that can come with consolidating your debt. Those upfront fees can impact your total debt, which can hurt if you’re simultaneously looking for a mortgage.

You know when you add more food to your order to avoid paying a delivery fee out of principle? When hunting for a debt consolidation loan, you want to pay as little as possible in fees.

Might Increase credit utilization ratio

If you go the balance transfer card route, which moves your credit card balance from one card to another, your credit utilization ratio could go up. Your credit utilization ratio is the amount you owe compared to your credit limit and a high ratio can negatively affect your credit score, making it harder to qualify for a mortgage.

Can I consolidate debt before applying for a mortgage?

You can absolutely consolidate debt before applying for a mortgage, and often this is your best bet for approval. If you begin your debt consolidation journey far enough in advance of your home buying search, whatever slight dips in your credit score from applying for a debt consolidation loan or balance transfer card should have worn off.