New homeowners will sometimes come find that current debt coupled with a new mortgage can be a bit overwhelming.
If possible, they would prefer to fold their current credit card debt into their mortgage.
This offers the benefit of having only one payment and a lower interest rate. However, while it is possible, some conditions must be met.
The first consideration is the loan to value ratio. Underwriters will have their own requirements for this. If the debt consolidation forces the ratio to become too high, the new homeowner will not be able to work the old debt into the mortgage.
For instance, if an underwriter requires a 95% ratio, and the home is valued at £300,000, the maximum value of the mortgage can be no more than £285,000.
Many lenders require at least a ten percent down payment on the home.
For the example listed above, if there was debt in excess of £15,000, it would not be possible to incorporate the debt consolidation into the mortgage (£300,000 base price less the £30,000 down payment, plus the £15,000 credit card debt maxes out the loan to value ratio).
Other considerations are how the debt will affect the loan payments and how much money would in fact be paid back over the course of the mortgage.
Since early payments are mostly interest, very little of the actual debt would be paid off in the early going.
Even with a lower interest rate on the mortgage, the homeowner may end up paying significantly more than if they were to just pay off the card on its own.
Folding debt into a mortgage can be complicated, but it is possible. However, turning it into favorable payments may not be so easy.
The debtor should seriously consider reworking their budget in an effort to free up more money to pay off the debt before considering taking on a bigger mortgage.
This will get the credit card debt out of the way quicker and enable them to have more equity in their home at the time of purchase.
