Could Debt Consolidation Be Your Key to Qualifying for a Mortgage?


It’s not unusual to have several debts, but it doesn’t help your chances of finding a great mortgage if you have so much debt that you’re struggling to pay it all. In fact, if you are having trouble making your payments, your credit score could be much lower than you need it to be to get approved for a mortgage, much less for one with a low interest rate. Plus, all those debts do not look very good to lenders.

The last thing you want to do, though, is hunt down a dangerously expensive subprime mortgage loan just because it’s the only one you think you can get with a low credit score. Instead, you need to work on your credit and get to the point where lenders would love to give you a stable, traditional mortgage with a manageable fixed interest rate.

How a Debt Consolidation Loan Works

One possible path to good credit is obtaining a debt consolidation loan. This is an interest-accruing loan, usually issued by a bank or lending company, that you use to pay off all your other debts. Then, you make one payment every month for a set number of years, instead of the multiple payments you had to make on your old debts.

When handled carefully, a debt consolidation loan gives you that step up that you need to conquer your credit, improve your score, and find a mortgage with an interest rate and type that you’re comfortable with.

How Those Debts Are Hurting Your Mortgage-Hunting Chances

Even if you are successfully making all your debt payments every month, the sheer amount of debt you have is a turn-off to lenders. Mortgage officers want to see that you have the income to cover not just the mortgage, but the interest, any repairs, property taxes, and more.

Those debts can also cause your score to drop very quickly if you can’t make them. For example, let’s say you have car repairs that you must get in order to keep your car running (so you can get to work). But the only way to afford the repairs is to miss a couple of debt payments. That will cause your score to drop.

Yes, your score can go up again, but it takes longer for it to rise than it does for it to fall. And those late payments stay on your report.

How Debt Consolidation Can Affect Your Credit

Paying off old debts actually doesn’t do that much to improve a credit score itself. However, if you can get a lower payment for a consolidation loan than you’ve paid each month for all your old debts combined, that consolidation loan is going to be easier to pay. Then, your payment record improves, which improves your credit score.

Plus, your old debts fade in importance. As they get older, they affect your score less.

Even better, if the debts paid include credit card accounts that are still open, your available credit goes up. If you can resist charging up a storm on the cards and can keep your utilization rate low, that also improves your credit score.

If you do have to use your credit cards, keep the use to under 30 percent of your credit limit all month long. Don’t max out a card even if you’re paying off the whole amount immediately — that maxing out is still considered high utilization.

Do you have a collection account? A consolidation loan could help you pay off that collection account in full, and that mark of paid in full looks very, very good to future creditors. Remember, as the paid collection account gets older, it factors less into your score, too.

When you want to start looking for a loan, contact Find options for mortgages, debt consolidation, reverse mortgages, and more. You’ll find the best path out of the credit woods and into the comfort of easy qualification for home financing.