Getting a mortgage while carrying significant other debt can put a serious strain on your finances. It might even keep you from qualifying for a loan. By consolidating your debt into your mortgage, you can move forward with the purchase while giving yourself the relief of spreading your other debt over 30 years. Just know that you still must come up with a down payment and understand that your debt potentially will be with you for much longer.
TL;DR (Too Long; Didn't Read)
Depending on the lender and the amount of debt, it may be possible to add the debt to a new home loan.
Reasons to Add Debt to Your Mortgage
Spreading out debt over a term of 20 to 30 years can reduce your payments significantly. Additionally, mortgage rates tend to be lower than the interest rates on unsecured debts such as credit cards. While rates will vary based on credit card and mortgage companies, a credit card can carry rates as high as 20 percent, while a mortgage can be as low as 3 percent. In some cases, your monthly payments might be so high, the bank will require you to pay off your debt in order to qualify for a mortgage.
Including Debt in Your Application
Indicate you want to include debt in your new home loan at the time of application. When you fill out the form, note the amount you wish to borrow. Include the purchase price minus the down payment and the total amount of other debt you wish to include. Select a term and write down the information on the property you wish to purchase. The application will also have a section dedicated to listing each specific debt to be paid off with your loan. List the creditor, the amount owed, the monthly payment and indicate that you want it included in the loan.
Obstacles to Approval
Although including debt in your new home loan can have benefits, the debt itself can be an obstacle to approval. If your repayment history is uneven, the lender will hesitate to approve your application. More importantly, the more debt you include, the more money you will need to put down. For example, if a bank lends up to 95 percent of the value of a property, you must put $10,000 on a $200,000 loan. If you add $15,000 in debt into that loan, you must put $25,000 down.
Coming up with that much more money may be difficult, even delaying or killing the purchase entirely. Of course, if you had that money to put down, you'd be better off satisfying the debt in the first place, unless you are getting the down payment as a gift from a relative, which is the only source of down payment lenders allow beside your own money.
Closing on Your Loan
When you are ready to close on the loan you will need to contact your creditors in addition to coordinating the parties for the purchase. You will obtain payoff figures from each creditor. This is the amount needed to satisfy your debt entirely on the date of closing. After you sign the documents, your lender will send payment directly to each company. Depending on your credit and the specifics of your loan, the lender may require that you close your accounts with the creditors so you don't rack up more debt, compromising your ability to repay the loan.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.