Does Debt Consolidation Affect Getting a Mortgage?

Are you wondering if debt consolidation affects getting a mortgage in 2023? You’re not alone. Many people think about using debt consolidation to manage their debt but worry about how it might affect their chances of buying a home. This article will help you understand:

What debt consolidation is and how it works.
The true cost of a bad debt consolidation loan.
The pros and cons of debt consolidation.
Different debt consolidation options.
How debt consolidation can affect your mortgage application.

Over 170,000 people visit our site each month for guidance on their money worries. We understand your concerns about unpaid debt and the process of getting a debt consolidation mortgage. Our aim is to give you clear, easy-to-understand information to help you make the best choice for your situation. Let’s explore the world of debt consolidation together.

Does debt consolidation affect getting mortgage approval?

Debt consolidation does affect getting mortgage approval to some degree. How much of an effect it has will differ between people, but how it affects you is probably different from what you imagined.

Debt consolidation may actually improve your chances of getting a mortgage.

Why can debt consolidation help your mortgage application

The reason why debt consolidation can help your mortgage application is not because of what debt consolidation does but rather what it avoids.

Debt consolidation is an early prevention strategy to stop people from getting into severe debt. It reduces their need to use debt solutions such as Debt Management Plans and Individual Voluntary Arrangements.

These solutions suit people already in debt, but they could leave a mark on your credit file for six years and decrease your credit rating.

You must meet lender criteria to get a mortgage, and mortgage providers carefully assess your credit history when deciding. Although these solutions may be your best option when in debt, they could hold you back if you’re trying to buy a home.

As I see it, mortgage consolidation doesn’t have to significantly impact your credit report. If you consolidate without actually missing any repayments, it will not negatively affect your rating.

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How else debt consolidation affect mortgage applications?

The above explanation shows how debt consolidation can prevent more considerable debts and the need to use services which harm your credit rating. However, debt consolidation could help your mortgage in another sense.

Debt consolidation is used to clear any remaining credit you owe in a more affordable way. If mortgage providers see your outstanding debts, loans and credit cards as less risky, you may have a better chance of getting approval.

However, the benefits of debt consolidation and mortgage applications will differ between applicants. The mortgage application process is meticulous and personal, which makes it hard to determine the blanket benefits of debt consolidation.

The impact of the timing of debt consolidation

When applying for a mortgage, timing can make a difference. In some instances, recent credit applications can temporarily reduce credit scores. This means that consolidating your debt just before a mortgage application may impact the chance of approval.

Lender	APRC	Monthly payment	Total amount repayable
United Trust Bank Ltd	5.99%	£218.73	£26,247.92
Pepper Money	6.86%	£220.24	£26,429.17
Together	6.95%	£220.40	£26,447.92
Selina	7.5%	£221.35	£26,562.50
Equifinance	7.7%	£221.70	£26,604.17
Spring	10.5%	£226.56	£27,187.50
Loan Logics	11.2%	£227.78	£27,333.33
Evolution	11.28%	£227.92	£27,350.00

Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable.

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Do mortgage lenders look at debt-to-income ratio?

A person’s debt-to-income (DTI) ratio is a significant factor that mortgage lenders consider before approving a loan application. A DTI ratio reflects how much of your monthly income is spent on repaying existing debts. These debts can include personal loans, car finance, and credit card debt.

Consolidating your debt could potentially reduce interest rates, therefore lowering your monthly debt payments. In turn, this can result in a lower DTI ratio.

How to calculate your DTI ratio

You need your gross monthly income and recurring monthly debt to calculate your debt-to-income ratio. For instance, if your monthly income is £2,000 and you use £500 to repay your debts, your DTI ratio is 25% (500/2000).

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Does credit utilisation affect mortgage application?

Credit utilisation is an essential factor when applying for a mortgage. Mortgage lenders gauge how much of a risk an individual is by how much of their credit card limit they’ve used. An individual’s credit utilisation rate helps to prove their reliability as a borrower and reflects their financial health.

Lower credit utilisation can help improve your chances of getting a mortgage approved.

Debt consolidations loans for all purposes

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Don’t forget, you can find helpful debt information on MoneyNerd. I’ve created free and easy-to-read articles on various debt topics to help you with financial planning on your debt-free journey.

Other Common Debtor FAQs

Here are more common questions people with credit ask when wanting a mortgage.

How Many Debts Can I Consolidate?

There is no limit to the number of debts and credit you can consolidate. Although you will only be able to borrow so much when you already have outstanding credit cards and/or loans.

Can Anyone Get a Debt Consolidation Loan?

No, getting a loan to pay off your other debts will still require the lender to conduct a credit check on you. If they see that you have too much outstanding debt or have failed to pay back other debts on time, they could reject you.

Can Anyone Get a Balance Transfer Credit Card?

The same applies to a balance transfer credit card. You will only get the balance transfer credit card if you get accepted after a credit check.

Should I Pay Off My Credit Card before Applying for a Mortgage?

Paying off your credit cards will reduce your debt when applying for a mortgage and could go towards helping you get approved. However, you might need to consider if paying a chunk of your debts will reduce the deposit you can put up. Reducing your deposit may prevent you from getting the mortgage too.

I have debts, How Can I Still Get a Mortgage?

If you have debts getting a mortgage will be more difficult. But it is not impossible. There are things you can do to put the odds in your favour.

First, you should check your credit file yourself to identify any mistakes. Sometimes errors can contribute to mortgage rejections. Another tip is to put down a bigger deposit. The more money you can save and put upfront, the more comfortable you will make a potential mortgage lender.