Does Debt Consolidation Affect Buying a Home?

How to ensure consolidating debt won't delay your dreams.

The right debt solution minimizes the damage to your financial future. Things like bankruptcy and foreclosure cause severe credit damage and can prevent you from doing things like buying cars and homes right after they happen.

But what about different forms of debt consolidation? Consolidating debt is usually one of your first lines of defense against the bad outcomes of severe financial distress, but can the solution also cause any delay to achieving your future goals?

Consolidating with a loan or credit card

With the first two options most people use for consolidating debt – credit card balance transfers and personal consolidation loans – there is no direct reason why either would make it difficult to buy a home. In fact, successful debt consolidation could actually make it easier to qualify.

Basically, you’re doing something to consolidate the debt yourself. As long as you make the payments on the solution you choose to use (either for the consolidated debt on a single credit card or to pay off the outstanding loan balance) then there’s no reason a lender would look at this negatively when you apply for a mortgage.

Of course, if you don’t pay off the consolidated debt, then you are missing payments and causing damage to your credit score. In this case, you’d have a harder time qualifying, but that’s only if the solution doesn’t work and you can’t keep up with the payments.

Otherwise, you may make it easier to qualify. A big part of mortgage approval is your debt-to-income ratio. If you reduce your debt by paying it off quickly after consolidation, then you’re in a better position when you apply for a mortgage. So it most cases, debt consolidation is a good thing to do before you buy a home, rather than a bad thing.

Consolidating debt with credit counseling

If you’re already struggling to keep up with your debt payments and your credit score isn’t good enough to qualify for DIY consolidation options at the right rates and terms, then you have a last option for debt consolidation through a credit counseling agency called a debt management program. This is like an assisted form of consolidation.

While you’re on a DMP, you can’t apply for unsecured credit like a credit card, but there’s nothing to prevent you from applying for a mortgage even while you’re on the program. The issue is that in many cases, you’re in a DMP because you’re already on some shaky financial ground. Buying a home may not be the right financial choice during the program, even if you can.

Fact: In most cases, enrollment in a DMP will not negatively impact your credit score.

And still, once you complete the program, you’ll be back on more solid financial ground. If you complete the program and become completely free of credit card debt, then your debt-to-income ratio will be good. And as long as you made all of your program payments on time, you typically shouldn’t have any credit damage. In fact, since you reduce debt and build a good credit history, you can actually improve your credit score over the course of a successful debt management program.

So even with this assisted form of debt consolidation, as long as it’s done correctly, it should be a good thing for you to achieve your dreams of homeownership instead of a bad thing. Remember, you don't necessarily need perfect credit to buy a home.

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