Mortgage Loans

Should I Consolidate Debt Before Buying a Home?

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    • FNBO

      Nov 25 2021

Should I Consolidate Debt Before Buying a Home?

Let’s say you have a credit card balance, car loan, and maybe you even have student debt. In other words, you owe money. Let’s also say, you’ve decided that the best strategy is to consolidate your debt for a lower rate and single payment, so you’re looking for a loan that allows you to do so. There are solutions!

A traditional debt consolidation loan can and will make managing your finances easier and may help you reduce the total interest you will pay, but could it also impact your chances of getting a mortgage?

To determine any downside, for those of you looking to both consolidate debt and finance a home, consider the following factors.

When Should I get a Debt Consolidation Loan?

To determine whether or not a debt consolidation loan is right for you there are two key pieces you should consider; the term of your debt and the interest rate of your debt.


Debt consolidation loans are best used when you have long or open-ended term debt with high interest rates due to the nature of how they are structured. Consolidation loans will have relatively short, specified terms—typically ranging from one to seven years. This means that you could pay off balances sooner than you would with loans featuring longer terms or revolving types of debt, such as credit cards.


Borrowers may also benefit from lower interest rates when taking out a debt consolidation loan. This is particularly true for credit card debt. For example, the average credit card interest rate was 14.7% in early 2021. At the same time, you could have taken out a debt consolidation loan with an average interest rate of 9.46%.

In this scenario, the combination of term and rate on a consolidation loan would allow you to pay off your credit card debt faster and at a lower interest rate, meaning you’d pay less out of pocket over the life of the loan. Just keep in mind that the interest rate you’ll receive depends upon a few factors, such as credit score and your individual financial situation.

Will a Debt Consolidation Loan Impact My Ability to Get a Mortgage?

Generally speaking, having a debt consolidation loan will not have a negative impact on your ability to refinance your home or obtain a new mortgage. In fact, it may actually improve your ability to qualify.

One thing that a lender will assess during the mortgage or refinancing review is your debt-to-income ratio. You can calculate this important formula by dividing the total of your monthly expenses by your pre-tax monthly income.

For example, if you make $4,000 a month and pay $1,100 in rent, $100 toward credit card debt and another $600 a month on a car payment, your debt-to-income ratio is 45%, a few points above the 35% to 40% that most mortgage lenders like to see.

Consolidating your debt could possibly have a positive impact on your debt-to-income ratio by reducing the amount of your monthly payment. For instance, if you roll your auto loan and credit card balances into a consolidated loan at a lower interest rate, and your monthly payments are reduced to $450, you could lower your the ratio to a point where you would more easily qualify for mortgage financing.

Is It a Good Idea to Consolidate Debt into a Mortgage?

It is very common for homeowners to consolidate debt, including credit cards, auto and student loans into their mortgage. Since interest rates for mortgages can be lower than other types of debt, particularly credit cards, you can reduce the overall interest you pay with a mortgage loan because you’re essentially using your home as collateral.

Rolling all of your debts into a mortgage then makes it possible to merge your financial obligations into a single monthly payment at a lower interest rate, thereby reducing your overall monthly out-of-pocket expenses. This improves your cash flow and may even make it possible for you to more aggressively save money.

However, there is a downside. While the typical term for a consolidated loan is usually no more than seven years, a mortgage term usually covers a 15- to 30-year timeframe. That means, you’ll be paying on that debt as long as you’re paying the mortgage on your home.

Seek Advice and Guidance Before you Act

Because you need to consider these factors, and more, it is important to sit down and talk to a mortgage lender before you make your next move. A loan officer will ask you questions about your short- and long-term financial goals and your present situation and then, provide you with options so you can make informed decisions. 

Remember that your financial well-being in the future is founded on the choices you make today! No matter your current position, you can make improvements. Seeking the advice of trusted professionals is a good step forward on the path.

The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.