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Debt consolidation loan before mortgage loan

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Established Member

Debt consolidation loan before mortgage loan

Hi everyone,

I know my wife and I are a little over our heads on our mortage purchase.  We are closing in september and I wanted to apply for a debt consolidation loan before the mortage. Would that affect our chances of getting the mortage loan? A little background about us. We have good paying jobs and can afford the monthly mortage. I have some debt i wanted to consolidate. My wife has a 780 score and I have a 688 score  last time i checked.  If I get the debt conolidation loan it should increase my score well over 700 according to the myfico simulator.  The better score would imporove our mortage rate and overall payment of the mortage.  Is it smart to move my debt from credit cards to 1 loan? Any advice would be appreciated. Thanks in advance.


Exp 719 - Equi 723 - TU 709
11 REPLIES 11
Moderator Emerita

Re: Debt consolidation loan before mortgage loan

Please clarify if you are in the middle of the mortgage process now or if you are planning to apply for a mortgage a little later this year.

 

If you are in the middle of a mortgage application please consult your LO about applying for a consolidation type loan to see what s/he says is the best route for you (to get one or not to mess with it). 

Message 2 of 12
Established Member

Re: Debt consolidation loan before mortgage loan

We're in the middle of the process but can't close until September because its a new construction. I asked my loan officer and she didn't have a clear answer. She just said it might drop my score initially but eventually bring it up.

Exp 719 - Equi 723 - TU 709
Message 3 of 12
Moderator Emerita

Re: Debt consolidation loan before mortgage loan


@krazy wrote:
We're in the middle of the process but can't close until September because its a new construction. I asked my loan officer and she didn't have a clear answer. She just said it might drop my score initially but eventually bring it up.

^^^That is true....a new inq will drop your score for an unknown period. However, if you do get a consolated loan the theory is you are moving your revolving debt to installment debt.  The installment debt payment will be lower than your current revolving debt payment (otherwise you wouldn't take the loan).  If the debt is the same amount and the payment is lower, and you pay off all of your revolving (or most of it) then your score will increase. You will still need to have a nominal amount showing on one cc (something like $20) that you payoff and recharge each month. 

 

Your LO should be able to run a simulator for you to show what your score can go to if you choose to do the consolidated loan. The simulator that the LO's have are better than the simulators we have access to...that's why I think you should explore this option with your LO a little more deeply.

Message 4 of 12
Established Member

Re: Debt consolidation loan before mortgage loan

Would it be bad to apply for a loan right before the mortage? My loan officer never really gave me a straight answer. Just worried about getting approved during the second underwriting process.

Exp 719 - Equi 723 - TU 709
Message 5 of 12
Moderator Emerita

Re: Debt consolidation loan before mortgage loan

Just my opinion:  better to apply sooner rather than waiting until you apply for a mortgage.

 

Why?  Because you need time to close on the new loan, payoff the revolving debt and have the new zero balances report to the CRA's so your score will be higher.  The reporting alone can take 30 to 60 days depending upon the credit card and the CRA.  As an example, I paid off a card in March and I finally had to dispute the TL a couple of days ago to get the zero balance to report. And you don't want to have to dispute because many lenders don't want any disputes on your CR as it masks your true score. How many cards are you consolidating into one installment loan?  How much do the balances total?

Message 6 of 12
Established Member

Re: Debt consolidation loan before mortgage loan

Consolidating 6 credit cards to one installment loan. The total balance is 30k.


Exp 719 - Equi 723 - TU 709
Message 7 of 12
Moderator Emeritus

Re: Debt consolidation loan before mortgage loan


@krazy wrote:

Consolidating 6 credit cards to one installment loan. The total balance is 30k.


What's the limits on those 6 credit cards?  If you have 160K in limits that's a lot different than if you're only at 35K in terms of benefit scoring wise.

 

The only big caveat is make certain you can fit the new loan under the backend DTI ratio; also I'd ask what negatives if any besides the potential revolving utilization are on your file as those will limit your score regardless.




        
Message 8 of 12
Valued Member

Re: Debt consolidation loan before mortgage loan

Agreed - This should have probably been addressed sooner.

 

1st, IF you want to take the chance on doing it, make certain that your new payment is not going to be higher than the combination of your credit card payments. I have seen nightmares in this situation.

 

2nd, as an LO, I would never advise a borrower to do this even if it was 4 months out. If you do it, you are going to have to prove that that loan paid off all of your credit card debt. That means 100% complete paper trail, going out of your account, showing your credit cards paid off, and it will be a ton of paperwork.

 

My advice to you is just to have the expectations - and quite honestly, it also depends on the type of loan you're getting. If it's an FHA loan, it definitely is not worth the hassle. The improvement is minimal. Conventional is a different story.

 

 

Message 9 of 12
Regular Contributor

Re: Debt consolidation loan before mortgage loan

It took out a debt consolidiation loan about 2 months before I got pre approved for a conventional loan.  In my case, I needed to raise my credit score to be approved.  However, I didn't actually find a suitable house until eight months after I had taken out the loan.  I personally wouldn't chance it even for a lower interest rate.  Lenders are so strict these days even when everything is plain vanilla.  Maybe you could take it out after you close and then refi a few months later?

Message 10 of 12
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