Families hoping to purchase a new home may wonder if this is even possible when they are saddled with debt already. While debt can certainly be an obstacle, it’s not necessarily an insuperable one. If you can reduce your debt prior to applying for a mortgage, this will raise your chances with lenders and broaden the scope of your options when it’s time to check out houses. If you are transitioning from a first to a second home, you will need a plan for dealing with whatever you may owe on an existing mortgage. Even if this is your first home, any debt you have from auto payments, medical bills, student loans, or credit cards should be reduced or, better yet, eliminated.
Check your credit score.
A bad credit score is a major detriment to securing any kind of loan, so before you proceed, know what kind of score you are working with. Check to be sure you have no outstanding bills or debt that was reported to collection agencies. Pay off any debts you can — as long as this doesn’t mean digging into emergency funds or putting too great a dent on your down payment. Even if you can’t pay off any debts, making prompt payments on them can help boost your credit score.
Consult an expert.
Dealing with debt is not only stressful, but it is also confusing. Reach out to someone who understands the ins and outs of debt management and find out what your next steps should be. Before selecting a freelance debt management consultant and entrusting them with something as important as your family finances, read reviews and compare rates of different providers. A good financial consultant should be able to help you with your budget, as well as guide you on the path to debt reduction.
Know your debt-to-income ratio.
If your debt is significantly great — and your income on the paltry side — you probably have a poor debt-to-income ratio. This will make you ineligible for a loan in the eyes of many lenders — you won’t be approved if your DTI ratio is 43% or higher. To illustrate, if you are making $5,000 per month and half of that goes to paying off debts, this is a situation that needs to be rectified. Unfortunately, this can’t be fixed simply by better budgeting — you either need to make more money or pay less debt.
Consolidate your debt as much as possible.
If the option to earn more and reduce your DTI ratio exists, great! But that choice probably isn’t available to most people. So how will you pursue the alternative solution of paying less debt? One option is to consolidate what you owe. One way to do this is to apply for a personal loan that will consolidate your credit cards. If you have student loans, look into consolidating them, as well.
Make a plan for your existing property.
If you own a home already, figure out whether you intend to sell it or rent it out — and which option will best suit your budgetary needs. Renting it out can be a good option for generating passive income and maintaining monthly mortgage payments. But if you need to pay off a mortgage or put down a larger down payment, selling your property might be advisable. Whatever you opt to do, research rental and purchase prices in your area so you can move forward with an awareness of what you can expect to get from a sale or rental.
Ideally, you will begin the debt reduction process well before you begin house-hunting, so you know your budget and what kind of loan you are likely to get. Even though debt management may seem like extra work added to the already laborious process of home-buying, remember that this will increase your buying power and give you more choices. When you’re ready to put your old home on the market and/or shop for a new one in the San Diego area, reach out to Butler Gore Realty Group. 858-229-9212