For most recent grads the two biggest financial goals are buying a house and paying off student loans. Unfortunately, the steps taken to accomplish one goal can get in the way of the other if you are not careful. The classic example of this conflict comes with student loan consolidation and trying to qualify for a mortgage.
If done properly, consolidating your student loans can make getting a mortgage easier. A mistake in your consolidation planning can make getting a house even more difficult.
How does student loan consolidation affect my mortgage application?
The two big factors on your mortgage application are your credit score and your monthly debt to income ratio. Student loan consolidation can affect both these numbers. Surprisingly, the consolation process can help or hurt your credit score and it can help or hurt your monthly debt to income ratio.
Consolidation and your credit score
How it helps – When you consolidate your loans you close multiple smaller amounts and ope one large account. The credit scoring systems look at one large debt more favorable than they look at many smaller debts.
How it hurts – In the short-term, consolidating your student loans can hurt your credit score. This is especially true if your oldest account/line of interest is a student loan. Having an account open and keeping it in good standing help your score. Closing one of these older accounts can cause a temporary dip in the score. Along the same lines, if you are consolidating with a private company, the pulling of your credit report can cause a dip in your score.
Ultimately, the credit score impact is relatively small. If you have an excellent credit score, you shouldn’t have much of an issue. If you are on the border, or worried about the impact of consolidation on your credit score, your best bet is probably to consult a mortgage professional.
Consolidation and your debt to income ratio
How it helps – When you consolidate your student loans with a private lender, you may be able to secure lower interest rates or more time to pay off your loans. By getting a lower interest rate or more time, your monthly payments will be lowered. Lower monthly payments means a better debt to income ratio.
How it hurts – Many people who chose to consolidate their loans actually opt for a slightly shorter repayment term. As a general rule the less time you have to pay off your loan, the lower the interest rate. In many cases paying just a little extra each month can get your loan paid off much sooner. If you go this route, it saves you money in the long term, but the larger required monthly payments hurt your debt to income ratio.
Putting together a plan
Mortgages and student loans are both incredibly expensive and require years to pay off. Before you reach any decision, talk to mortgage professionals and student loan lenders to get a better idea of the feasibility of your plan. At least one company, SoFi, offers student loan consolidation services and mortgages. If you get to talk to someone with experience dealing with both products, you can flesh out all of your options.