Debt Consolidation Mortgage Facts
By Andrew FreiburghouseMortgage Credit Problems Columnist
For a person suffering from out-of-control debts, a debt counseling agency that can negotiate a manageable debt consolidation plan may look like a savior in a glowing white robe.
While it is certainly true that debt counseling agencies can provide a great service, there are pros and cons to taking out a debt consolidation loan, especially if a mortgage is is hopefully in your future. If getting a mortgage is your goal, it's vital that you know how debt consolidation can affect that goal--before you commit to anything.
Debt Consolidation May Help You Get a Better Mortgage
The good news is that a debt consolidation loan, if you use it right, can much improve your chances of getting an affordable home loan. This is true because of a number of factors, including:
-- Debt consolidation can lower your so-called "revolving debt balance," a key indicator evaluated by mortgage underwriters. Revolving debt is debt that can be carried over from month to month with only a minimum paid, such as credit card debt. Mortgage underwriters are rightfully wary of lending to individuals with huge revolving debt balances.
-- Debt consolidation can lower your total debt owed. Sometimes, a credit counseling agency may be able to negotiate a reduction in credit card debt as part of a debt consolidation agreement. For example, a removal of fees and penalties.
-- Debt consolidation can regularize your "debt-to-income ratio." Another measuring stick used by mortgage underwriters, debt-to-income ratio is simply your monthly debt obligation divided by your monthly gross income. Mortgage underwriters like to see that percentage well under 50% and closer to 30%.
All mortgage terminology aside, perhaps the most important positive that can come of a debt consolidation plan with respect to getting an affordable home loan is this: if you faithfully pay your debt consolidation loan, month after month without being late or missing a payment, you are showing that you have learned how to use credit correctly.
You are showing, in other words, that you're ready for a mortgage.
Debt Consolidation: Potential Negatives When You Apply for a Mortgage
Before you rush into debt consolidation in hopes of purchasing the home of your dreams within six months, here are a few things to be aware of when consolidating debt:
-- Debt consolidation is no substitute for a budget. If uncontrolled spending got you into credit card debt, make sure that you get your spending under control before entering into a debt consolidation agreement. A debt consolidation loan should be a chance to get your financial house in order, not a temporary fix that just lets the problem get worse.
-- Debt consolidation can affect your credit score. There are differing views on how debt consolidation impacts credit scores, because it really depends on the situation at hand. If you take out one fixed rate debt consolidation loan to pay off all your credit card balances and you stick to that payment, over time your credit score is likely to go up. If, however, your debt consolidation plan entails a reduction in debt owed, your credit score may go down.
-- Typical debt consolidation plans "stretch out" your high interest credit card debt into one lower interest rate loan. This reduces your monthly payments, sometimes quite drastically, but it may also mean that you end up paying more on your debt in the long run, simply because there is a longer run there. A mortgage is a long run, too. Not everyone is ready for two long runs of paying off debt. Borrowers who are closer to retirement, for instance.
Similar to the potential benefits, the most significant potential drawbacks of a debt consolidation loan depend upon one very important person: you, the borrower. If you use a debt consolidation loan correctly, you may enjoy a better chance of getting a good mortgage. If you use a debt consolidation loan incorrectly, the opposite can be true.
Debt Counseling Services Help People Figure This Stuff Out
It's a lot to think about, right?
The fact that you are thinking thinking this matter through, both pros and cons, indicates that you are serious about using credit wisely. That seriousness of purpose is perhaps the best statement you can make to a lender about your readiness to take on a mortgage.
If you are in this stage, consider speaking with a debt counseling agency. An honest, competent debt counselor can help you crunch the numbers on different debt consolidation scenarios, while keeping in mind your ultimate goal of getting your dream mortgage on your dream home.
Make sure to emphasize that the mortgage issue is your major concern.
About the Author
Andrew Freiburghouse is a writer and businessman. As a partner at Los Angeles tax preparation firm Pronto Income Tax of California, Inc., Andrew has advised thousands of clients on a variety of financial matters. Currently, Andrew lives in Brooklyn, NY.
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