How To Consolidate Debt To Qualify For A Mortgage

Use debt consolidation to qualify for a mortgage carefully

Consider the use of debt consolidation to qualify for a mortgage very, very carefully. Follow these tips to avoid being one of the 85 percent who fails debt consolidation.

Debt consolidation can lower your debt payments, allowing you to qualify for a larger mortgage

  1. Debt consolidation can be a home equity loan, debt management plan, or unsecured financings like personal loans or balance transfer credit cards
  2. Consolidating your debts can extend your repayment and increase your costs
  3. Debt consolidation works for a small percentage (about 15%) of those who try it. Be careful out there.

Debt-to-income ratios

Lenders are very concerned about debt. Typical guidelines say that as much as 43% of your gross income can be used to repay monthly debts like your housing, credit card, and auto payments.

Dividing these bills by your monthly income determines your debt-to-income ratio or DTI. If you have a household income of $7,000 a month, 43% equals $3,010. That’s your limit for housing plus other account payments. But not living expenses like food and utilities.

If you have two car loans at $500 each, $400 a month in student debt, and $200 for credit cards, that’s $1,600 a month, leaving just $1,410 a month for mortgage principal, mortgage interest, property taxes, and property insurance.

In a lot of markets, that leaves less than $1,000 a month for the mortgage itself. At 4.5% over 30 years, a borrower qualifies for about $200,000 in financing.

How debt consolidation works

If you already own a home, a home equity loan for debt consolidation is probably the best form of financing available. But you’re trying to get a home, so home equity is probably not an option for you.

If your monthly payments are too high to qualify you for the mortgage you want, you may be able to stretch those ratios by lowering your payments.

For instance, suppose you owe balances in three credit cards with an average interest rate of 14%, and you can pay them off with a five-year installment loan at 6%, why wouldn’t you? You will pay less each month, and your debt will be gone in five years. It’s unlikely if you keep making the minimum payments you currently have.

It’s great to pay down debt. Your credit score will improve, and that will help with a mortgage application. However, moving debt from a credit card to a home equity or personal loan doesn’t magically make it go away. You only get debt-free by actually paying off the alternative source of funds.

And paying down old debt doesn’t do much good if you create new debt. You have to deal with the whole debt cycle and that means you have to have a budget.

How to consolidate debt to qualify for a mortgage means having a budget. But the reality is that we all must live within our means. If we don’t do this, we don’t get mortgages.

Are your ready to take the next step in financing your future home? Talk to an expert by filling out the form below.