First time home buyers have plenty to think about. There’s the process of saving for a down payment, closing costs and moving expenses. These expenses, and many others, all play a role in determining how much “home can be afforded.” There is the necessity of exploring mortgage options, comparing rates and fees – and cleaning up the credit report and profile ahead of that process.
What about finding the right home in the first place? Choosing the right real estate agent, the right type of house in the right type of neighborhood while sticking to a budget and negotiating with the seller – none of this is quick and easy stuff.
Now, throw in the prospect of attempting to do all of this successfully while saddled with high interest rate credit card debt, personal loan debt, student loan debt…what’s a first time home buyer to do? Buying your first home can be challenging – especially if you’re dealing with debt. However, there is hope. Learn more from our first time home buyers guide to debt consolidation.
First Time Home Buyers Guide to Debt Consolidation
Buying a house when you’re in debt isn’t always easy. Mortgage lenders are generally concerned about pre-existing debt and the debt-to-income ratio of a mortgage applicant. The rule of thumb for debt-to-income ratio is that up to 43% of pre-tax income can be earmarked to repay monthly debts related to housing, auto loan, student loan and credit card payments.
First time home buyers who are carrying significant debt can run into challenges in securing the appropriate home mortgage when pre-existing minimum monthly payments already account for too much of the 43% in the debt-to-income ratio. For example, if a mortgage applicant earns $7,500 per month but has two car loans that total $700 per month, $400 in minimum monthly credit card payments and $400 in student loan payments, that $1,500 of monthly debt payments already eats into 20% of the pre-tax monthly income, or almost half of what’s allowed under the 43% ceiling on the debt-to-income ratio.
However, there is a possible solution – debt consolidation. A first time home buyer debt consolidation loan (DCL) combines multiple debts into one single loan, typically resulting in a lower interest rate and, importantly, for the purposes of first time home buyers – a lower monthly payment.
The lower monthly payment that results through debt consolidation can free up space within the debt-to-income ratio to allow for approval of a larger monthly mortgage payment.
Creating more room for the monthly mortgage payment not only makes it easier to get approved for a mortgage, but it can also allow for a smaller down payment and larger mortgage loan when buying the house. Interest rates on debt consolidation loans frequently are lower than those attached to credit cards, so a DCL taken out in the form of a personal installment loan can make a difference for a first time home buyer in debt qualifying for a mortgage.
Through a debt consolidation loan, it becomes possible to borrow sufficient funds to pay off a variety of unsecured debts (credit cards, installment loans, private student loans, etc.), while resulting in a lower combined monthly payment.
The DCL also simplifies the repayment process, combining multiple monthly payments into one single monthly payment that helps avoid inadvertent delinquencies and late fees that can harm a credit score and make the debt more expensive.
Can You Consolidate Debt into a New Home Loan?
In many cases, the interest rate attached to a mortgage will be lower than the interest rate associated with other forms of debt. Therefore, it understandably becomes tempting to try to consolidate higher interest rate debt into a new home loan. However, it’s not always easy to pull this off. Mortgage lenders generally don’t like to loan more than the value of the property, so this means a larger down payment may be required to create the space necessary to deploy funds borrowed through a home mortgage to consolidate pre-existing higher interest rate debt.
Underwriters will take a careful look at your credit report and repayment history before lending funds that are earmarked for credit card repayment. An additional consideration is that credit card debt is unsecured, which means that there is no collateral backing that can be seized in the event of non-payment. However, a home mortgage is a form of secured debt – backed by the collateral of the property itself – and this becomes subject to the foreclosure process, typically when a home mortgage falls delinquent by over ninety days. Therefore, the risk of home seizure as a result of credit card debt getting rolled into a mortgage must be evaluated and fully manageable, given the resulting size of the expected monthly mortgage payment.
Can You Buy a House After Debt Consolidation?
The answer is yes – if you plan early and get started well before pursuing a mortgage. The key is to consolidate significant pre-existing debt through some combination of a personal installment loan and promotional low interest rate balance transfers. Personal loan companies are amenable to funds being utilized for debt consolidation, and frequently grant loans ranging up to $40,000 or more. Online resources is an excellent place to begin a search for a personal loan that can ultimately free up space within the debt-to-income ratio and make it easier to qualify for a mortgage as a first time home buyer in debt.
Meantime, promotional rate balance transfers remain a useful tool for managing higher interest rate credit card debt and saving disposable cash each month while lowering monthly payments, also making it easier for a first time home buyer in debt to qualify for a mortgage with a lower debt-to-income ratio. Start the process early. Although 0% promotional balance transfers are typically reserved for individuals with FICO credit scores well into the 700s, it is still possible to find low single-digit interest rate promotional balance transfer offers if you have a good credit score and profile.
About the Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.