Debt consolidation is a very useful tool when you’re struggling with a lot of different debts. It lets you take all those different debts and combine them into a single one by taking out a new loan that allows you to pay them off. It can be extremely helpful for many people.
Meanwhile, owning a home is a dream for many. It’s a signifier of financial success that you can buy a home.
Have you ever considered the possibility that debt consolidation could affect your ability to apply for a mortgage? When it comes to a mortgage application, they take everything into account, which includes the fact that you have gone down the debt consolidation route.
In this blog, we’ll look at the effects debt consolidation can have on your mortgage application.
Positive Effects
Fortunately, there are some positive effects that debt consolidation can have on your ability to apply for a mortgage. These effects include:
Improves Your Cash Flow
You may be able to save hundreds of dollars per month by consolidating your debts into one lower-interest loan and making only one monthly payment. That improved cash flow is proof to lenders that you have the ability to manage a mortgage payment on top of your other expenses.
Improve Your Credit Score
If you make consistent and on-time payments on your new loan, it can drastically improve your credit score. A credit score is a crucial factor when a lender is considering your mortgage application.
A Reduction in Debt Utilization
Consolidating a bunch of high-interest loans into a single loan with a lower interest rate means a reduction in your credit utilization ratio, a number that represents the percentage of available credit you’re using. A lower number is a good sign for lenders.
Negative Effects
Unfortunately, debt consolidation can also have some negative impacts on your ability to apply for a mortgage. These include:
Short-term Impact on Your Credit Score
When you initially take out a debt consolidation loan, it can lead to a small dip in your credit score. The inquiry from the application process is what causes this. However, this is only temporary and your credit score will easily recover with timely payments and reduced debt levels.
Higher Debt-to-Income Ratio
When processing your mortgage application, lenders will consider your debt-to-income ratio. This measures how much your debt payments are vs. how much you earn in a month. If you take out a debt consolidation loan, it may temporarily increase this ratio until you’ve begun to pay down your new loan.
Call D & A MacLeod Company for Debt Counseling and Financial Advice in Ottawa
Ultimately, debt consolidation is a great option for those who are looking for a mortgage application but are saddled with multiple debts. The drawbacks are short-term and the positives are well worth it.
If you’re looking for financial advice and debt counseling in Ottawa, you can turn to D & A MacLeod Company. We can help you with debt consolidation options and mortgage applications. Please give us a call today.
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