Applying for a mortgage makes it possible for people to buy property even though they don’t have access to the full purchase price immediately. If you wish to apply for one but have a hefty debt on your name, it’s best to seek a debt consolidation loan before you enquire about a mortgage.
But, you may be wondering does debt consolidation affect buying a home?
Here’s how it works:
Can a Debt Consolidation Loan Increase your Borrowing Capacity?
The lender’s main concern with regards to your mortgage application, is whether you will be able to pay off the loan within a specific time frame or not. Do you have the capacity to pay off a debt consolidation loan? They will pay close attention to your current patterns in paying off a loan as a measure to predict the way you will be paying in the future.
When you pay off your debt consolidation loan timeously, you will have more money available so that you can get the best home loan possible. Furthermore, paying off a loan is great for your credit score, which means that you are a step closer to getting your dream home.
Credit Card Debt Consolidation
If there is a balance on your credit card, the mortgage lender will also assess you based on that. But this is not the only aspect about credit card debt that affects your ability to get a home loan. The mortgage lender will focus on your credit limit and how much you spend, as well as the rate in which you pay it off.
For example, if there is a balance of $2,000 on your credit card and your credit limit is $5,000, a mortgage lender will evaluate your loan as if you are required to make payment on the whole $5000.
If you hold more than one credit card, the balance on each of those cards as well as the limits on each specific card can add up. If your credit limits add up to $10 000 in total, then you will also need to have the capacity to pay off this amount, if it hypothetically had to get to such a point.
You can use a debt consolidation loan to pay off any credit card debt you may be owing, and close off any cards that are not in use. It is important for you to keep a reasonable credit card limit so that your credit rating is in your favor when it comes down to taking out a home loan.
What are the Disadvantages Associated with Debt Consolidation
Debt consolidation loans aren’t always considered a plus when it comes to applying for a home loan. If you take out a loan and don’t take other measures to ensure your credit safety, such as closing down a credit card, you could end up deeper in debt than you ever were before.
Debt consolidation loans can negatively affect your current credit score. Taking out a personal loan or even getting a new credit card means that you will need to make a credit enquiry. Each time you decide to make an enquiry regarding a personal loan or any loan for debt consolidation, it is noted down on your credit record. This could affect you when you are making an application for a home loan.
Again, your credit score means everything when making a mortgage application. Lenders get an idea on how responsible you are with paying money back.
Conclusion
Debt consolidation loans are great for getting your finances under control and planning for the future ahead. Just be sure to be reliable in your payments and keep your credit record in good order. It’s all smooth sailing from there onwards.
Does debt consolidation affect buying a home? You can use a mortgage calculator online to get a better idea on how a debt consolidation loan can impact your credit score and borrowing capacity.
