How To Pay Off Debt Before Buying A Home
If you are seriously thinking about buying a home you’ll need to understand that it may not be easy. There are so many things to consider on both the purchaser’s and the lender’s sides. Income is not the only deciding factor when it comes to purchasing a home.
Debt is something that is looked at just as closely as your income by lending companies and other financial institutions. Debt directly affects the amount of money you can afford towards a monthly payment (i.e. your mortgage loan). It might be a good idea to take a very close look at your debt and how to decrease it before venturing into the world of home ownership.
I know what you’re thinking. “But HOW do I do this?” Try these suggestions:
Reduce your debt to income ratio (DTI)
The DTI ratio is the total percentage of your monthly gross income that goes toward paying debts. The ideal DTI is about 26% or lower. However, this can vary depending on other factors such as down payment or credit score.
Reducing this ratio can be achieved by paying off debts faster (paying more than the minimum on each monthly payment, for example) or increasing your income. Paying off credit cards or personal loans maximizes your chances of getting a higher loan amount and better interest rate.
Build up your real income
Real income is the net income you have left after taking liabilities (expenses) out of the equation. It’s what you’d have left to make a house payment. You can increase your real income by decreasing some liabilities. Look at what these are and find areas where you can tweak or restructure.
Avoid more debt
When lenders look at your loan application, they will want to see cash flow. When you have debt, the payments you make monthly take away from your cash flow. Think of a stream with clear flowing water. Now throw some rocks in the stream. The water doesn’t flow as well, does it? Debt is like those rocks.
Buying a home is one of the biggest purchases you will ever make. It is a big decision with many factors surrounding it. It may not be the right time for some because of too much debt. But with hard work, discipline, and motivation it is possible to achieve the American dream.