It takes good planning to ensure that you’re in the best financial shape when you decide to purchase a home, so the transaction goes smoothly. But if you have a heavy debt-load, it can take a lot more than that. You may find that it takes a considerable amount of maneuvering to get your finances just right so that a lender can approve you for a mortgage.
Should you get a debt consolidation loan before buying a house? That is the type of question potential homebuyers should have to make sure they don’t delay their dreams. It’s a good question!
Debt Consolidation Loans Explained
In most situations, a debt consolidation loan means having a significant amount of your debt rolled into one payment, so the debt is more manageable. Reducing the number of payments that need to be paid each month is a huge burden relief for potential homebuyers. It is also a fantastic way to reduce the amount of interest you’re paying on credit cards or high-interest loans. The loan does not always require collateral or a perfect credit score. There are different types of debt consolidation loans, and each one is handled very differently.
Common debt consolidation loans include:
- Personal Loans
- Home Equity Loans
- Home Equity Lines of Credit or HELOC
- Credit Card Balance Transfers
Moving Forward After Signing a Contract
After you put in a contract on a home, the next thing you will do is speak with a loan officer or mortgage broker. Most likely, you will submit a loan application. The loan officer will have you list all your debts, liabilities, and assets, as well as your income and other pertinent information. If your debt-to-income is too high to qualify for the mortgage, you might not be able to move forward.
You may think that getting a debt consolidation loan is a good idea. After all, you’re putting yourself in a better financial position, right? But that is not how the mortgage lender will see it.
As you will learn about debt consolidation loans at Freedom Debt Relief, they can generally be a good idea when chosen and applied carefully. But the rules are different when you’re buying a house. The mortgage lender wants to see a solvent buyer and a solid financial portfolio. If a lender suspects that you cannot afford the home with the income and liabilities that you currently have, you could be in jeopardy of being approved.
Options When Your Debt-to-Income is Too High
If you think that you can accomplish getting a debt consolidation loan without the mortgage lender finding out, think again, you will be unpleasantly surprised. The lender may randomly review your credit file throughout the underwriting process – and just before closing. If the lender sees a new credit inquiry made in advance or during the process, you will be asked to explain it. In fact, most loan officers will advise you not to apply for any new credit.
Instead of seeking a debt consolidation loan, it’s more advantageous to be proactive with a debt restructuring plan. Show the lender, at the time of the application, how you’re planning to reduce the debt before closing on the home – without seeking a debt consolidation loan. As long as there is a paper trail and you’re not borrowing the money to accomplish a better debt-to-income ratio, typically, this is looked upon favorably by a mortgage lender.
It’s also important to note, if any of your credit obligations have a remaining term of six months or less, such as a car loan or personal loan, then the liability may be deducted from your debt-to-income ratio when underwriting occurs.
Your best option when considering a debt consolidation loan is to get counseling before entering into a contract on a home. If your finances are already on shaky ground, do you really want to risk buying a home without a solid foundation? Asking, “should you get a debt consolidation loan before buying a house,” is a good first step in the right direction, as long as you choose the right answer.