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Tips for Reducing Debt Before Buying a Home
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Are you planning on buying a home within the next year? Now is the time to scrutinize your finances, pay off debt, and start saving more aggressively. It’s not impossible to buy a home while in debt, but it can be more challenging to get a mortgage at rates you can afford if your debt-to-income ratio is too high. Here are some great tips to help you reduce debt, improve your credit score, and get your finances in order before buying a home.
Determine Your Down Payment
The amount of money you need for a down payment will vary widely depending on your housing market, your financial situation, and your type of mortgage. Start by researching local home prices so you can get a better idea of your home’s affordability. If you can afford to put 20% down on a home, you’ll have an easier time securing a mortgage with existing debt and your monthly payments will be more manageable, as well.
Just remember, buying a home comes with many additional upfront costs that are not included in the down payment. You may have to make a lower down payment so you have money left over to cover application fees, real estate agent fees, and lender fees. According to Forbes, you should expect to pay between 2% and 5% of the home purchase price in closing costs.
Consider Different Financing Options
When it comes to financing your home, a traditional mortgage isn’t your only option. Be sure to research alternative mortgage types so you can find the best solution for your financial situation. For example, a PennyMac FHA loan could be a good choice for first-time homebuyers with less money for a down payment and lower credit scores. FHA loans enable first-time buyers to qualify for a mortgage with broader financial requirements and down payment options as low as 3.5%. If you’re a veteran or military service member, be sure to look into VA loans for low interest rates and no down payment requirement.
Consolidate Your Debts
While special home loans will make it easier to get a mortgage, your lender is still going to scrutinize your debt-to-income ratio. If a high portion of your monthly paycheck is going towards regular debt payments, consider consolidating all of your debt onto a loan with a lower interest rate. This will reduce your minimum monthly payments to improve your debt-to-income ratio. At the same time, consolidating your debt can improve your cash flow so you can put more money towards your down payment. As a bonus, you'll no longer have to worry about paying several different bills every month — and risk late fees when you forget.
Track and Budget Your Spending
If you’re trying to pay off debt, it may help to make a few temporary cuts to your household budget. Go back through your credit card statements from the past couple of months and determine how much money you're spending in different categories. Based on what you learn, come up with a realistic budget that will enable you to reduce your spending in non-essential areas so you can put more money towards debt payments. Budgeting apps can help you track your money and stay within your allocated spending for each budget category.
Pick Up a Side Hustle
Another way to pay off debt quickly is to pick up a side hustle. There are many different jobs you can do on the side to make an extra $500 to $1,000 a month. If you know your way around digital advertising, you could run Facebook ads for small businesses. If you have a car and some spare time in the evenings, consider delivering food with DoorDash or Uber eats. If you’re just looking for a quick and easy way to put your organizational skills to good use, become a virtual assistant. Your options are nearly endless, so find a side gig that interests you and run with it.
Buying a home requires a lot of careful planning, especially if you have existing debt. If you have your heart set on a home purchase in the near future, start developing a debt management plan as soon as possible so you can get approved for the mortgage you need.
ARTICLE BY: Katie Conroy, Blogger