Should You Consolidate Debt or Renegotiate Credit Card Interest Rates Before Buying a Home?

Renegotiating the interest rates or consolidating your credit card debt prior to qualifying for a home seems to make sense, right?  After all, credit card debt left unchecked can pile up quickly, especially if you are making the minimum payments.  However, one of these actions can cause your home loan approval to get denied.  So don’t do anything before calling a Mortgage Professional who knows how this will impact your ability to qualify.

To understand why one action is better than an other when preparing to qualify for a mortgage, you need to understand how the FICO credit scoring model works with Equifax, Transunion, and Experian.

Did you know that making the minimum payment on a credit card balance of $5,000 at 23.99 percent APR won’t pay it off for 16,127 years.

Renegotiating Debt

If you can renegotiate the interest rate on the credit card without closing and opening a new credit account, this is safe to do prior to qualifying for your home loan.  Just make sure you have the credit card company document everything and keep making your payment.

In this 4-minute piece from NBC’s The Today Show, you’ll learn the tested tactics that can cut a credit card rate, and get monthly payments to a more manageable range. And it’s do-it-yourself — no debt management firms required.

Some of the tips in the video include:

  • Compare your current rate to the rate offered to new customers. Ask the lender for “new customer rate” if it’s lower.
  • If your credit score has improved since application, ask for an interest rate more reflective of your current credit score.
  • Be nice to the customer service representative. Kindness helps.

Consolidating Debt

This is where people get in trouble.  If you have three smaller balance cards at higher rates and are trying to consolidate them into one lower rate card, this will lower your payment.  That will help your monthly cash flow situation.  But, when you apply for and open the new credit card, your score may drop 5-15 points.  And when you transfer the existing debt to the new card, you will end up closing the old cards.  Closing older established credit cards is bad for credit scores and will definitely drop your score another 10-30 points.

I have seen borrowers call me who recently consolidated a bunch of high interest rate credit card debt in hopes they can qualify for a larger home loan and/or to help increase their credit score, only to find out what they did had just the opposite affect.  It actually lowered there score 20-40 points and caused them to be ineligible for a home loan.

Managing debt is an important part of household budgeting so if you’re planning to purchase a home in the next 4-6 months and want to take some action to improve your financial situation, call me first at (951) 215-6119.  If you just want to reduce your credit card payments or think the interest rate is too high for your liking, try following the instructions as described in the video.  And, above all else, be persistent. The credit card companies won’t likely approve your first request.

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