Should I Consolidate Debt Before Buying a Home? (2024)

FAQs

Should I Consolidate Debt Before Buying a Home? ›

Generally speaking, having a debt consolidation loan will not have a negative impact on your ability to refinance your home or obtain a new mortgage. In fact, it may actually improve your ability to qualify. One thing that a lender will assess during the mortgage or refinancing review is your debt-to-income ratio.

Depending on which debt consolidation method you choose, it could improve your debt-to-income ratio — a key factor that mortgage lenders consider in reviewing your application. It could free up more money to put toward a down payment on a house.

And 51% of student loan holders say their debt has delayed them from purchasing a home, a 2021 NAR report found. Paying off debt before buying a home is a practical concern: Depending on how high your debts are, you could be denied a mortgage or incur a high interest rate on one, even if your credit score is good.

However, most experts recommend waiting at least 2 years after finishing debt settlement before applying for a mortgage. Waiting gives you time to: Improve your credit – Negative marks from debt settlement stay on your credit reports for 7 years. But their impact lessens with time.

NAR found that among buyers who were rejected for a mortgage application in 2022, their debt-to-income ratio was the culprit 32% of the time. It's worth making the effort to pay off some or all of your outstanding debt before trying to buy a home.

Generally speaking, having a debt consolidation loan will not have a negative impact on your ability to refinance your home or obtain a new mortgage. In fact, it may actually improve your ability to qualify. One thing that a lender will assess during the mortgage or refinancing review is your debt-to-income ratio.

Success with a consolidation strategy requires the following: Your monthly debt payments (including your rent or mortgage) don't exceed 50% of your monthly gross income.

Find your DTI by adding together all your current monthly debt obligations, including your likely mortgage payment, and dividing it by your monthly pre-tax income. The ideal DTI—which will get you access to the most favorable mortgage terms—is 36% or less.

Most mortgage lenders want your monthly debts to equal no more than 43% of your gross monthly income.

Should you pay off all credit card debt before getting a mortgage? In some cases, especially if your current credit score makes it difficult for you to get a mortgage loan, it's a good idea to pay down credit card debt. But keep in mind that credit card debt isn't the only factor in getting mortgage approval.

Is it wise to consolidate debt? ›

Consolidating debt can be a good idea if you have good credit and can qualify for better terms than what you have now and you can afford the new monthly payments. However, you might think twice about it if your credit needs some work, your debt burden is small or your debt situation is dire.

Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.

There is a high probability that you will be affected for a couple of months or even years after settling your debts. However, a debt settlement does not mean that your life needs to stop. You can begin rebuilding your credit score little by little. Your credit score will usually take between 6-24 months to improve.

The general rule of thumb is that you shouldn't spend more than 10 percent of your take-home income on credit card debt.

“Consumers can and should do both.” Even if you're working on paying down debt, building a healthy savings fund can help you avoid adding to that debt. Having an emergency fund reduces the financial burden when the unexpected happens, even if you start with a small amount and save slowly.

Generally speaking, you won't get approved for a mortgage if your debt-to-income ratio is above 43% (if the number you got using the above equation is 43 or higher, it's too high). If you're eager to buy a home soon but have an unfavorable debt-to-income ratio, your best bet is to pay off existing debt.

In most cases, paying off credit card balances—or paying as much as you can to bring their balances down—is the right move. You'll be able to lower your DTI and, hopefully, increase your credit score and qualify for a lower interest rate on your mortgage.

Consolidation has potential downsides, too: Because consolidation can lengthen your repayment period, you'll likely pay more in interest over the long run.

Consolidating your debt can lower your monthly payments, but it can also cause a temporary dip in your credit score.

However, credit cards and personal loans are considered two separate types of debt when assessing your credit mix, which accounts for 10% of your FICO credit score. So if you consolidate multiple credit card debts into one new personal loan, your credit utilization ratio and credit score could improve.