Brought to you by Adam Evans from Citebrain.com
For most people, the idea of buying their dream home is enticing. However, purchasing a house is also tricky, especially if you have a lot of debt.
When you start looking for a mortgage, lenders take a close look at your financial life. They’re going to check out your debt-to-income ratio, usually looking for a number at or below 36 percent. Additionally, they’ll review your credit report and FICO score, ensuring your credit history makes you a reasonable risk.
If you want to increase your odds of being viewed favorably by a lender, managing your debt before you apply for a mortgage is wise. If you aren’t sure where to begin, here’s how you can get on the path toward a new home by tackling your debt the right way.
Know What You Owe
The first step you need to take is to figure out exactly what you owe. Create a list of all of your debts, including the monthly payment, remaining balance, and interest rate information for each one.
For loans, it’s also wise to list how many payments are left or the date the loan is due to be paid off using the lender’s original schedule. For revolving debts with automatically decreasing minimum payments or variable interest rates, figuring out those dates may not be practical. However, if you can come up with a solid estimate using a credit card minimum payment calculator, it may not be a bad idea.
Choose a Debt Pay-Down Method
With the debt snowball, you focus on the size of the debt, putting extra money toward the smallest one first and working your way up through your list based on the amounts owed. With the debt avalanche, you focus on the debt with the highest interest rate instead.
Both strategies have benefits and drawbacks. Look into each one and see which approach may work best for you.
Create a New Budget
Now that you have a debt pay-down strategy, it’s time to create a new budget. Along with your debts, you’ll need to factor in other living expenses, such as utilities, insurance, and groceries.
As you create your budget, look for opportunities to save. Cut expenses that aren’t necessities, like dining out or little-used subscriptions or memberships. Additionally, exploring alternative sources for certain high-cost services, like internet and car insurance.
You’ll also want to research home prices as you create your budget. That way, you can come up with a savings goal for your down payment and make sure you set enough money aside to reach that figure.
With a bit of diligence, you’ll end up with a workable budget that lets you prioritize paying off debt. Then, just follow that roadmap to stay on target.
Get Help from a Professional
If your debts are overwhelming, getting professional help may be your best bet. Usually, you’ll want to connect with a reputable nonprofit credit counseling organization. They’ll be able to review your budget and discuss your options. Additionally, they might be able to set you up with a debt management plan (DMP) if that is appropriate, giving you a clear path for conquering your debts.
If you go this direction, do be wary of potential scams and dishonest debt settlement or debt relief companies. Some organizations make promises they ultimately won’t keep. You may also encounter heavy fees or be asked to take actions that harm your financial situation instead of help.
Ultimately, a bit of due diligence is essential. Make sure to research any organization carefully before you reach out. That way, you can make sure you’re partnering with the best group available.