Are you already dealing with several debts? But are you still considering applying for a home loan? Then consolidating your debt might seem like a good move. Doing so helps you streamline your repayments and secure a better interest rate. But you should understand how this can affect your loan application. This is where a home loan broker in Sydney can help.

So how does it all work?

Debt Consolidation

This is when you merge multiple loans into one larger loan. These could be your credit card debt, personal loan, or car loan. It would mainly focus on helping to simplify payments. Even possibly lowering interest rates. This is a handy thing to do when you have several repayments as it makes a better repayment structure.

But how does this impact borrowing a mortgage?

Does Debt Consolidation Affect Your Home Loan Application?

Yes. Lenders want to ensure you’re a good candidate for home loans. So they will assess your income, credit score and any existing liabilities. Did you already consolidate them? It does not automatically disqualify you. But it will affect how lenders view your financial standing.

Find out below how this can affect your home loan approval:

1. Your Credit Score May Fluctuate

Your credit score may initially experience a slight dip when you consolidate your debt. That’s because doing so means you get another loan. And so another credit check. But they can also raise your score as long as you pay off your debt over time.

Why is your score important? Lenders will use it to assess how risky a borrower you are. A short slide may make your lenders think twice. But a long-term improvement of your score will be in your favour. Especially when you eventually apply for a mortgage.

2. Debt-to-Income Ratio

How much is your monthly income? Now, how much of it goes to your debt? Debt like car loan payments and credit card minimums. A high DTI implies you may have trouble making more payments. Whereas a low DTI informs loan providers that you can handle a mortgage.

You could also improve your DTI and become a more attractive borrower if your debt consolidation lowers your monthly repayments. But your DTI will not change much if you just combine all your debts without reducing the total amount you owe.

3. Available Equity

Some borrowers use their home equity to get a larger loan when consolidating debt. This can be helpful to reduce interest rates. But it also takes from your home equity. This means lenders might reconsider approving a new home loan. That’s because your equity is already connected to a consolidated loan. And this is when you want assistance from a home loan broker.

Will Consolidating Debt Help or Hurt Your Approval Chances?

Combine your debts to streamline them. This means you can simplify repayments and better manage them. This will help you achieve a good credit score step by step. So you can apply for a home loan in the future.

But you could also hurt your borrowing capacity. That is if you need to take out a bigger loan. Or even use home equity to consolidate. You might become over-leveraged. And lenders will see it as a sign that your finances are disorderly.

When is the Best Time to Consolidate Debt?

You have to get the timing right especially in significant financial decisions. And here are some of the circumstances where consolidation may be useful:

• Prior to Applying for a Home Loan: Consolidate before taking out a mortgage loan. This allows time for the sting on your credit score to fade and begin increasing again. Multiple debts are difficult to manage most of the time. So combining them into one achievable loan will inevitably clean up your financial situation.
• When Interest Rates are Low: You will look more financially stable to lenders if you consolidate debt at a much lower rate. It will also improve your cash flow.
• If You’re Struggling to Make Payments: Can’t keep up with multiple monthly payments? Consolidating them can help you manage it better since you’re combining them all into one debt.

Consolidating Debt vs. Managing Debt

Debt consolidation means applying for another loan. But you use that loan to pay off your current debts. Meanwhile debt management plans don’t necessarily require a new loan. You’ll just restructure how you repay your current debts instead.

Learn the difference before applying for a home loan. Especially if you plan on using debt consolidation to manage your financial situation beforehand. Lenders may have a better opinion of consolidation compared to management.

Differentiating Secured vs. Unsecured Debt Consolidation

What are secured loans? These use assets like your home as collateral. This offers lower interest rates. But it also has a higher risk because you may lose your home if you default. What about unsecured loans? These don’t need collateral. But it usually comes with higher interest rates.

Weigh the pros and cons of both options. Consider how they’ll impact your mortgage approval before consolidating your debt. For instance, consolidating through a secured loan may look better to a lender, but it also puts your asset (usually your home) at risk.

How Can a Home Loan Broker in Sydney Help?

So you’ve already consolidated your debt. The next step is applying for a loan. Make things easier with the help of a mortgage broker. Home loan applications aren’t always a breeze. Especially when debt consolidation is involved. But brokers have access to a broad range of lenders. And they can help you handle all the complexities.

They assess your financial situation. They’ll also suggest strategies for improving your application. Next, they’ll find lenders who are more willing to work with you.

Stay on Top of Debts and Home Loans – Call AFMS Group

Trying to juggle applying for a home loan while managing multiple debts? Not a good idea. But you can make things easier through debt consolidation. We’ll even find the right loan for you. So work with us and let us take the stress off your back. Focus on winning your financial goals instead. Curious to learn more? Call us.