So you and your sweetie have decided it's time to combine forces and not only live together but buy a home together. Debt consolidation means obtaining a new loan and paying off as many of your unsecured loans as possible. That new loan is usually secured on an asset, often your home, but it can be secured against other major assets. The debt consolidation loan might be unsecured. Whether you can consolidate your debts and buy a home depends on several factors.
At Time of Purchase
You could consolidate your debts with part of the mortgage proceeds if you have the wherewithal to make a 20 percent down payment, steady income, a low debt-to-income ratio, and the house you're buying has a high enough value to have some equity at time of purchase. Here's an example: You have credit card debts of $23,000. Let's say the home's appraised value is $300,000 and you are purchasing it for $250,000 plus putting down $50,000, which brings the mortgage down to $200,000. The lender might be willing to give you a mortgage of $223,000 to pay off that credit card debt. You would still have $77,000 of equity in the home.
Not Going to Happen
In the halcyon days of real estate before the banks went pretty much bust, it was possible to get a home loan for more than 100 percent of the value of the house. So you'd get a loan for 105 percent and use the 5 percent in effect as a debt consolidation loan and pay off your debts. That doesn't happen any more.
Another factor mortgage lenders consider is your debt-to-income ratio. Add together all your loan payments including credit cards, personal loans, car loans and mortgages. It shouldn't be higher than 36 percent of your monthly income, according to BankRate.com. The consolidation loan is, in effect, just swapping out one kind of debt for another, but with a lower payment so it could improve your chances for a mortgage.
Credit worthiness is one of the most important factors in buying a home. The higher the credit score the better and the lower the interest rate you'll qualify for on the mortgage. If both of your salaries and assets are needed to qualify for the amount of the mortgage, then both credit scores will be reviewed. Debt consolidation itself doesn't necessarily affect your credit score. If you need the consolidation loan because you're behind on your credit card payments, however, the late payments do affect your score and your chance to get a mortgage.
Too much available credit is not necessarily a good thing. Lenders look at how much you have available and what would happen if you used it all. When you use the proceeds of the debt consolidation loan to pay off your unsecured creditors, those paid off accounts become available credit. The temptation to use the credit to finance new furniture for your new house could be great. Closing the accounts has a downside as well. Older, well-established credit lines have more impact on your credit scores than new credit. In this case a consolidation loan could hurt you.
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