Buying a home is a big commitment. You need to have money saved up for a down payment. You’ll also need money for repairs and emergencies. You want to make sure your finances are in order so you can qualify for a mortgage and keep up with the costs of owning a home.
One way you can get your finances in order is by consolidating your debt. You can consolidate debt and buy a home, but depending on how you consolidate the debt, it can have a negative impact on your credit score. That can make qualifying for a mortgage more challenging.
It's possible to consolidate debt and buy a home, but you should be aware of the impact consolidation can have on your credit score.
Options for Consolidating Debt
If you want to consolidate your debt, you will need to obtain a loan. You can apply for secured or unsecured loans.
Secured loans use your property as collateral, meaning that if you default on the loan, the lender can take the property. One example of a secured loan is a home equity loan. If you already own a home and have equity, you can borrow against the equity in your home. You can also refinance your home with a cash-out refinance where the amount of the new mortgage is higher than the existing loan. In this case, you could convert your home equity into cash you can use for paying off your debt.
You can also apply for an unsecured personal loan to consolidate your debt. Lenders will look at your credit score when determining whether to give you a personal loan. You may want to apply with multiple lenders to see who gives you the best interest rate. Taking out a personal loan for debt consolidation can lower your credit score temporarily since it's a large, new account without an established payment history.
Qualifying for a Mortgage
One of the factors that lenders look at when they are deciding on whether to approve you for a mortgage is your credit score. Since a debt consolidation loan lowers your credit score, your interest rate might be more than it would have been before consolidation. If your credit score was low before the consolidation, you may not qualify for a mortgage at all.
Conventional mortgages typically look for a credit score of 620 or higher. Federal Housing Administration mortgages require a credit score of at least 500. If your credit score is between 500 and 579, you may need to make a down payment of 10 percent.
Other Options for Improving Your Credit
If you’re concerned about the impact a debt consolidation loan will have on your credit score, you may want to consider improving your credit in other ways. Paying down your debts as quickly as you can help raise your credit score. If you’re concerned about paying interest, start by paying off the debt with the highest interest rate first.
If you can resist the temptation, keep your credit cards open after you pay them off. Your credit score is also impacted by the ratio of used credit to available credit called utilization. If you close credit card accounts, you’ll have less available credit, which can lower your credit score.
If you’ve missed payments in the past, it will take time for your credit score to bounce back. If you have a good payment history, keep it up by tracking your due dates. Many credit card companies offer email alerts for when payments are due. If you think you will have trouble making a payment, contact your creditor. They may be able to work with you.