Even when you're careful about managing money, emergencies or financial setbacks can leave you facing unwanted debt. The interest charges and fees many creditors charge can make it even more difficult to get your debt under control. By rolling your debt into a new home loan, you can consolidate your debts and lower your payments. Although they carry a clear benefit for borrowers, consolidation mortgages pose a higher risk for the lender and aren't easy to come by. Available consolidation loans often carry stringent qualification requirements. If your lender allows you to include short-term debts into your home loan, however, doing so can make your financial obligations more manageable.
LTV and Consolidation
Not all lenders will allow you to roll your old debts into your new mortgage. If your bank agrees to let you use your mortgage to consolidate your debts, your loan must fall below a certain loan-to-value, or LTV, range. Your loan's LTV is simply the percentage of the property that carries a mortgage. You can calculate your LTV by diving the property's appraised value by the amount you plan to borrow. Banks' policies differ, but most will not let you exceed an LTV of 80 percent on your new mortgage – regardless of whether or not that mortgage includes additional debt.
Lowering Your LTV
There is no guarantee that the home you want to buy will fall into the proper LTV range. The lower a home's price is when compared to its fair market value, the better your odds of achieving the LTV you need. When you begin house shopping, consider looking for foreclosures. Foreclosed homes often sell for considerably less than their fair market value, which gives you extra wiggle room where your LTV is concerned. You can also make a sizable down payment to lower your LTV, but if you have the extra money to make a large down payment, you might realize a greater financial benefit by using the money to pay down your debts directly.
Although finding a home you love that also meets your lender's LTV requirements presents a challenge, it is well worth it in the end. As a general rule, mortgage loans carry much lower interest rates that other types of debt, such as personal loans and credit card debts. By using your new mortgage to consolidate these high interest debts, you lower the amount of interest you pay each month and save money over time. In addition, mortgage interest is tax deductible whereas most other interest charges are not.
Your income and credit history aren't the only aspects of your financial stability that your lender evaluates when you apply for a mortgage. Your lender also reviews your current debts – including your new mortgage payment – and compares them to your income to determine whether or not you can actually afford the new loan. The lender does this by calculating your debt-to-income ratio or DTI. Lender requirements regarding your DTI will differ, but if your lender believes you have too much debt to reasonably afford your mortgage payments, it may require that you pay down your debt before approving the loan rather than use your new mortgage to consolidate those debts.
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.