Imagine finding your dream home: perfect location, great neighbors, just the right amount of bedrooms and bathrooms and beautiful backyard. Then imagine never being able to buy it because your lender won’t approve you for a loan. Ouch! If you are thinking about buying a home in the near future, you need to take an honest assessment of how much a lender will approve you for. After all, if you know you won’t be approved for a $200,000 loan then you shouldn’t be looking at $200,000 houses. If you know that you are in too much debt to buy the house that you want, now is the time to act. Here are some practical tips on how to get out of debt to buy a house.
How To Get Out Of Debt To Buy A House
Find out how much you owe
The first step you need to take is to find out how much you owe. If you are like most people, you may have a vague idea that you are in debt but not exactly sure on how much or percentage rates. You need to get a clear picture of how much you owe so that you can make a plan to decrease your debt.
Consolidate your debt
Consolidating your debt doesn’t mean that you will owe any less when it comes to principal balance, but it can help you save a good bit on monthly payments. Student loans are the main type of debt that you can consolidate for savings. Instead of making four different payments to four different lenders, you can get that debt consolidated into one payment to one lender. You can also take a look at other credit cards that you own to see which ones have the lowest interest rates. You may be able to pay one off with the other (for example, paying off a store credit card with your bank credit card) if you know you will save money in interest. As long as you end up with lesser monthly payments, consolidating debt is a great idea.
Depending on your situation, refinancing your car may also help you to lower your monthly payments. You may have initially financed it through the dealership that you bought the car from but realize that now your bank is offering a better interest rate. Again, whatever will help you lessen your monthly payment will make your lender more likely to approve you for a higher loan.
Plan to save
Once you have made the major shifts of consolidating your debt and possibly refinancing, it is time to make a savings plan. You should already be saving part of your income just as a good finance habit, but when you are planning to buy a home you will need even more of a savings cushion. Cut back on extraneous spending so that you will have the cash you need for a down payment or any home improvement costs that may come up. Have a goal in mind and create your own savings plan.
Your credit score plays a big role in how much lenders will approve you for. If you have damaged your credit in the past, you may have a long way to go since your credit score is based on your credit history. You should aim to keep all credit card balances at 30 percent of the credit limit. For example, if you have a $1,000 credit card, you should not charge more than $300 to the credit card. If you do, just try to pay the principal down to $300.
Paying off debt
Since mortgage lenders are basing their loan approval on your debt-to-income ratio, the less debt and more income you have the more money (more and better home options) you can have. Since you probably can’t make a big change to your income, the best you can do is to pay off debt. Paying off credit cards is a great way to decrease your debt and keep more of your paycheck every month. If you have multiple credit cards, you can use Dave Ramsey’s debt snowball plan to knock out debt quickly. Pick your smallest debt and put all your extra money towards paying it off. It will be encouraging when you get it paid off, then you can move on up to the next debt.
Your monthly income, as well as your assets, will be considered by lenders. Assets are any property that you own that have value. This includes any additional homes or property you may have. If you are looking to sell a home you acquired through inheritance or want to move quickly due to divorce or foreclosure, Ben can help you get the cash you need. He has helped many Indianapolis residents sell their home for cash and do what they need to do. You could use that cash to pay off debt or put a down payment on your new home. Give our office a call today to get a consultation and quote.