Using debt consolidation to save for a home
Debt consolidation is a good way to get your finances in order and lower your monthly debt payments, but few people realize that it can help them to save for a home. If you’re dreaming of buying a home, debt consolidation can be a good first step towards home ownership.
In order to be a good candidate for home ownership, you have to have a healthy savings account, good credit, and a low level of consumer debt. Banks do not like see home buyers with a lot of credit card debt because this type of debt typically indicates that a person is not financially stable. Furthermore, banks tend to prefer that loan candidates have absolutely no more than 40% of their income going towards debt repayment. This figure includes the mortgage payment.
By reducing what you owe on credit cards, however, you’ll look like a much better credit risk. Debt consolidation can help with virtually every aspect of preparing financially to buy a home.
Debt consolidation replaces all of your current credit cards and loans with a single monthly payment. This means that all of these accounts are paid off, and your credit report shows just a single notation for the debt consolidation loan. Often, banks won’t consider debt consolidation loans to be as detrimental to a mortgage application as they consider a credit card. If the monthly payment for the debt consolidation loan is lower than what you were previously paying, the bank can give you a higher mortgage amount.
As you make on-time payments on your debt consolidation loan, you’ll most likely discover that your credit score improves. Previous mistakes such as missed and late payments will fall off of your report over time, and they will be replaced with the good information from your debt consolidation loan. Combined with your lower debt burden, it’s possible to see your score improve by 100 points or more.
Finally, paying less interest on your debt means that you’ll have something each month to put towards savings for a down payment and closing costs. In some cases, people have saved hundreds of dollars a month thanks to the lower monthly payment and reduced interest rate of their debt consolidation loan. That’s all money that can be used to make a down payment or increase your purchasing power.