Does Debt Consolidation Affect Getting a Mortgage

Most of us don’t realize that so many factors affect our credit score and creditworthiness when we seek to obtain a loan. Whether you want a loan for a new car, or you’ve found a great house and you’re looking into getting approved for a mortgage, you’ll have to have some form of credit history to present to any lender. 

Sometimes debt consolidation comes into play on your personal finance journey, and if you’ve consolidated any of your debts in the past you might wonder if this activity will affect your mortgage approvals. We’re here to give you the details on debt consolidation and getting a mortgage. 

Hard Versus Soft Credit Checks

First of all, we have to cover the difference between hard and soft credit checks. A soft credit check is a fairly popular and frequently used credit check that you can even utilize yourself, to see what your credit score looks like. The key factor with soft credit scores is that  they won’t affect your credit score after the fact. Soft credit checks are commonly used for loan pre-approvals and personal credit score tracking. 

A hard credit score, on the other hand, involves a lender pulling a credit report. This activity will inevitably lower your credit score by a few points or many, depending on how often you have these hard checks completed. These credit checks are more formal and less frequent, and they are typically enacted by a more serious lender looking to move forward with a new borrower. 

The Timing of Your Debt Consolidation

Getting a mortgage after a debt consolidation move is all about the timing. Here’s the deal: debt consolidation involves a hard credit check and the possibility of increasing your overall debt for the sake of convenience. With debt consolidation, you’ll move from many payments to one payment; from many interest rates to one interest rate; and from many lenders to one lender. This “moving around” of debt might lower your credit score significantly in the short-term, but it might be a great long-term choice if you can’t get on top of your payments. 

If you choose to consolidate your debt well before you apply for a mortgage, your credit score should have had time to improve, and you’ll likely get approved for a mortgage with a great rate. But don’t leave it up to fate! Make sure you make payments on time, watch your debt to income ratio, and participate in other financial behavior that will impact your credit score in a positive way.

However, if you try to fast-track your debt consolidation and mortgage application processes, you might run into some trouble. Our best tip is to space these two events out over time, if you truly need to consolidate your debt to make it manageable. 

Evaluate Your Situation

Ultimately, it’s up to you if debt consolidation might be the right move to improve your situation. If you think consolidating your debts would help you improve your debt to income ratio, it might be a great choice for you. But, if you plan on purchasing a home relatively soon, it could be worth it to wait to consolidate your debt until after you secure your mortgage. Whatever your choice, getting a mortgage is an exciting time in your personal finance journey that requires strategic thinking and smart money choices. Happy house hunting!