Bills Logo

Consolidating Debt and Qualifying For A Mortgage

Mark Cappel
UpdatedMay 14, 2024

If I consolidate my debt with a loan will this hurt my ability to get a mortgage?

Will a debt consolidation loan that will save us $400.00 per mo. negatively impact attempts to secure a mortgage when we attempt to buy a home? We would likely qualify for an unsecured personal loan with our credit union. The loan would be for 5 yrs. or less. We would be consolidating $18000.00 in high interest credit card debt. Thanks

Generally speaking, consolidating debt with a personal loan does not negatively impact a persons ability to qualify for a mortgage. One benefit of consolidating your debt and lowering your over all monthly payments is that it will reduce your debt to income ratio. Having a low debt to income ratio is very important when trying to qualify for a mortgage. However, I cannot say whether you will see an impact to your credit as a result of your consolidation. Credit score calculations are too complex for me to say whether this will impact your scores. If you credit scores are negatively impacted, this could affect your ability to qualify for a mortgage. This typically does not happen, but it is possible. Below I will provide you with information regarding what you need to know about qualifying for a home loan.

Before you buy a home, it is crucial that you weigh how you can afford to pay for it. You don’t want to waste time or money by bidding on a house that you cannot afford or by applying for a loan that is beyond your means to pay month after month and year after year. Figuring out your budget for your home will make it easier to get the right loan and also to know what changes you may need to make to your finances and to you credit profile. (Credit Profile vs. Credit Score)

As a standard rule you are advised to buy a house worth no more than 3 times your gross household income. Use this figure if you have some other debts, such as student loans, car payments, or sizable credit card balances. If you have no other debts, you likely can afford a house that costs as much as five times your annual household income.

When potential lenders review your ability to qualify you for a home loan, they are going to pay close attention to your debt-to-income ratio (DTI). To determine your DTI, start by computing your total net monthly income. This includes your monthly wages and any overtime, commissions or bonuses that are guaranteed; plus any pension monies or monies that come from alimony or child support, if applicable. If your income varies month-to-month, calculate your monthly average over the past two years. Don’t forget to include any other monies earned, whether from rentals or any other additional income.

To determine your monthly debt obligations, make sure to include all of your credit card bills, any loans, such as automobile, student, or personal and the amount of the new mortgage payment in the loan that you will apply for. Make sure to include your monthly rent payments if you rent. When you are adding up your credit card obligations, use the minimum required monthly payment. Divide your total monthly debt obligations by your total monthly income. This is your total debt-to-income ratio. The lower your DTI, the better. A high DTI can prevent you from getting the loan. It also can be a warning sign that even a loan that you qualify for could be a serious burden to make each month.

Most lenders traditionally will qualify your for the loan with a DTI of 28% to 44% of your monthly income. In other words, if your monthly income is $4,000, the lender would ordinarily want you to pay no more than $1,760 (.44 x $4,000) toward all your debts. Some sub-prime lenders will allow borrowers to have DTI ratios as high as 55%.

You may have compensating factors that will allow you to qualify for the loan, even with a less than desirable DTI. For instance, if you have an excellent credit record, a lender might allow you to go more deeply into debt. Just how high a DTI you can have and still qualify for the loan will depend on such factors as the amount of your down payment, the interest rate on your new mortgage, your credit history and score, and how much other debt you are carrying.

Continue on the Part 2 of Qualifying for a Mortgage and discover mortgage qualification terminology, paperwork, and more.

I hope this information helps you Find. Learn & Save.



The mortgage market: what's new?

No surprise that mortgage rates fluctuate. If you are thinking about purchasing a home or maybe considering refinancing your current mortgage, then you want to be up to date on mortgage rates.

Mortgage rates April 10, 2024
According to Freddie Mac, the 30-year mortgage rate for the week of April 10, 2024 stands at 6.88%. This reflects a 6 basis points increase from the previous week's rate.
Note: A basis point is equal to one-hundredth of one percent (0.01%). In numerical terms, if the mortgage rate changes by 20 basis points, it means the rate has changed by 0.20%.
Additionally, Freddie Mac reports that the 15-year mortgage rate for April 10, 2024 is 6.16%, indicating a 10 basis points increase from last week’s rates.

What does the mortgage rate mean for you?
Mortgage rates play a vital role in determining your monthly payment. Let's take a look at the avergage interest rates (APR) for April 14, 2024 based on Zillow data for borrowers with a high credit score (680-740) in the United States:

  • For a 30-year conventional loan, the interest rate is 7.09%.
  • If you opt for a 15-year conventional loan, the interest rate stands at 6.29%.
    Using the rates mentioned above, a $279,082 30-year-year mortgage would result in a monthly payment of $1,874. On the other hand, a 15-year mortgage would require a monthly payment of approximately $2,399.

Experience a smooth mortgage process: Shop around and get pre-approved today!
Shopping around for mortgages and getting pre-approved can make your home-buying or refinancing process easier. Ready to take the plunge? Check Out mortgage rates now for the best options available.



AAnonymous, Nov, 2018

I received a solicitation to apply for an urgent loan today. It said I can apply for any loan of my choice because, the lender provides all, even Xmas loans. They say that their interest rate is 3%. They gave me a way to contact them through email and phone.

Is this legit? I could use a loan but don't want to get scammed.

DDaniel Cohen, Nov, 2018

Mark an offer that comes via email for an unsecured personal loans at 3% as "too good to be true." It is probably a scam to lure applicants into paying a fee in advance, then taking the fee and running.