If your debt has become overwhelming and you have fallen behind on payments or worry that you may not be able to continue making payments on time, debt consolidation may offer a means of managing your debt. This strategy involves making a single payment each month for your debt instead of having to make payments to several creditors each month. It may also help you manage your debt by lowering interest rates and waiving late fees. However, debt consolidation may affect your ability to obtain a mortgage.
Debt Load
Participation in a debt consolidation plan can indicate to a potential mortgage lender that you are experiencing financial distress. If a mortgage lender discovers a debt consolidation reference on your consumer credit report, it may decide that your debt-to-income ratio is already higher than you can comfortably handle. The lender may reason that adding a monthly mortgage payment to your debt load may cause you to default on your mortgage. For this reason, a potential mortgage lender may deny your loan application, even if you have not fallen behind on your payments.
Plan Restrictions
Depending on the company managing the debt consolidation, you may not be able to apply for a mortgage or any other type of debt until you have repaid your existing debts. Some debt management and consolidation companies reason that if you are already experiencing difficulty handling your debt payments, you should not incur any new debt until you have fulfilled your existing financial obligations.
Credit Score
Although participating in a debt consolidation plan may prevent you from obtaining a mortgage loan, it will not affect your credit score. Debt consolidation companies report participation to the credit bureaus, and notation of debt consolidation appears in your credit file until you have repaid your debts in full. However, FICO, the pioneering credit-scoring company, ignores these notations when determining your credit score.
Considerations
A debt consolidation plan can help prevent credit score damage and can help you increase your creditworthiness over time. FICO considers the amount of debt you carry in addition to your payment history, so consolidation can result in a higher score as you pay down your debt. This means that if you enter into a debt consolidation plan before you start missing payments, your credit report and score will likely be attractive to mortgage lenders after you complete the plan.
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