Debt Consolidation

Does Debt Consolidation Affect Buying a Home?

Though it can have a short-term impact on your credit score, debt consolidation can improve your financial health and increase the chance of mortgage approval.
Bruce Hodges
May 31, 2024
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Does Debt Consolidation Affect Buying a Home?

When it comes to managing debt and planning for the future, many Canadians find themselves considering the potential impact of debt consolidation on their ability to get a mortgage.

The truth is that a debt consolidation loan can have both positive and negative effects on your mortgage application. We’ll explore both in this article and give our recommendations on how to increase the chance of mortgage approval.

Key takeaways:

  • The effect of a debt consolidation loan on your ability to buy a house will depend heavily on your financial habits and the timing of your mortgage application.

  • In the short-term: Consolidating debt can slightly lower your credit score and may affect your debt-to-income ratio, two factors considered in the process of getting a mortgage.

  • In the long-term: Debt consolidation can increase your credit score and improve your overall financial health, which are all good signals for mortgage lenders.

How A Debt Consolidation Loan Affects Buying a Home

The goal of debt consolidation is to simplify your payments and make them more manageable. 

Used responsibly, it can become a powerful tool for aspiring homeowners to build good credit and free up resources for mortgage payments. 

Here's a breakdown of the potential benefits and drawbacks:

Positive Effects

  • Improved cash-flow: Parachute’s clients typically save an average of $300 per month by consolidating at our lower interest rates and making just one monthly payment. This enhanced cash-flow demonstrates to lenders that you have the capacity to manage a mortgage payment on top of other expenses.

  • Better credit scores: Consistent and on-time payments are likely to improve your credit score which is a critical factor in mortgage approvals.

  • Reduction in debt utilization: Consolidating multiple high-interest debts into one single loan with a potentially lower rate reduces your credit utilization ratio. This represents the percentage of available credit that you're using, and a lower number is a positive sign for lenders.

Negative Effects

  • Short-term impact on credit score: Initially, taking out a debt consolidation loan might lead to a small dip in your credit score due to the hard inquiry from the application process. It isn’t permanent, however, and you can bring it up again with timely payments and reduced debt levels.

  • Higher debt-to-income ratio: Mortgage lenders consider your debt-to-income ratio, which measures your debt payments in relation to what you earn in a month. Taking out a consolidation loan could temporarily increase this ratio until you’ve begun to significantly pay down your new loan.

You may encounter these initial hurdles during the debt consolidation process, but they can be overcome with responsible financial habits.

Should You Consolidate Debt Before Buying A New Home?

There is no right or wrong answer, but in general, you shouldn’t consolidate debt too close to applying for a mortgage. Buying a home is a huge financial decision, and it’s ideal to get your debt payments and credit score in line before undertaking a mortgage.

How to Make Debt Consolidation Work For You

If you're leaning towards debt consolidation, here’s what you can do to mitigate risks and maximize your chances of getting approved for a mortgage:

  • Time it right: It’s best to consolidate your debts first, then gradually build up good credit before you apply for a mortgage. This time buffer allows you to benefit from the positive impact of improved cash flow and a more favourable credit score.

  • Maintain a solid payment history: Paying your consolidation loan on time and consistently will reflect positively on your credit report and strengthen your mortgage application.

  • Consult with a professional: Financial advisors and mortgage specialists can provide personalized guidance and help you find the best debt consolidation product for your specific situation.


While debt consolidation can initially affect your credit score and debt-to-income ratio, it can also be a stepping stone to homeownership. Consolidating debts can improve your financial health over time and increase the chance of mortgage approval. The key is to plan ahead: consolidate well before applying for a mortgage and focus on consistent payments to improve your credit score in the long run.

Related articles: 

Tips for Building, Maintaining, and Repairing Your Credit Score

Help With Debt & Tips for Canadians Who Are Struggling

How to Save for a House 

Bruce Hodges
Bruce, Founder and CEO of Parachute, worked for several of Canada’s top Banks, published research for the Canadian Bankers Association, and taught E-commerce Strategy in Wilfrid Laurier University’s MBA program. His first start-up built credit solutions for the likes of National Bank, Fair Isaac, and Ford Credit globally. Prior to starting Parachute, Bruce was COO of Foresters Financial, and EVP Transformation at CIBC, one of Canada’s top 5 banks. Bruce founded Parachute to disrupt the financial wellness space taking on payday, and high interest predatory lenders, with the intent to bring at risk Canadians back from the brink to good financial health.
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