Simple Strategies for Debt Management When Preparing to Buy a Home
If you are carrying debt but thinking about purchasing a new home through Summit Real Estate in the next year, you may be wondering whether taking on a mortgage would be a mistake. As excited as it is to start hunting for your dream house, you don’t want to make a financial misstep and get in over your head.
While taking on additional loans may seem less than ideal, owing money is simply a fact of life in the U.S., and many are managing to become homeowners in spite of this. You don’t need to be a financial expert to minimize the obstacles posed by debt; you just need to educate yourself on how best to manage it, well in advance of your prospective date of purchase.
First, check your credit score.
Watch your credit score closely so you are aware of any problems with your credit, or errors in your credit report. To qualify for a mortgage, you need to have a score of at least 620, but if you are hoping to get a good interest rate, you should aim for at least 740. Monitor your credit by asking for free reports from each of the three main credit bureaus, and ask your financial institution or a free scoring center to send you your score.
Even if your score is lower than you’d hoped, there are many ways you can quickly improve it. Be sure to take care of all your bills on time and pay off any older debts or maxed out credit cards. You can also research debt consolidation plans to see if you can lower your monthly payments.
Know your debt-to-income ratio—and how to improve it.
Debt-to-income ratio is separate from your credit score and doesn’t alter it, but it may affect your eligibility for a loan. If your earnings are not significantly greater than the amount you owe in an equivalent period, lenders could be wary about offering you a mortgage. And even if you do manage to land a loan with a high debt-to-income ratio, you may be setting yourself up for financial hardship later.
Make a budget and stick to it.
Be realistic about what you can afford, and remember, it’s usually unwise to sink all your savings in a home purchase. You will want to budget not only for monthly mortgage payments but also for a down payment. The larger your down payment, the better your interest rate will be, and the smaller your monthly payments, so figure out if there are any small sacrifices you can make now in order to put down more on a home purchase. It’s also important to set aside funds for the unanticipated expenses of homeownership. Remember, what you are adding to your existing debt is not just your monthly mortgage payment: it is also the cost of repairs, upkeep, taxes, and utilities.
Be flexible. And look for ways to make your new home pay.
If you are set on having a home of a certain size in a specific neighborhood, you may need to wait until you’ve reduced existing debt or raised your income. But if you are willing to be flexible and can see yourself living happily in a variety of different domestic spaces, you may be able to purchase sooner.
Depending on your present situation, and the kind of residence you hope to acquire, you may be able to use your new home to increase your monthly earnings and mitigate the weight of debt. One possibility would be renting an area of your new home, especially if you live in a university town or a popular vacation area. If you are moving into a residence with land attached, you could start a garden and sell produce at local markets, during the warmer months.
Whatever your situation, don’t wait until the last minute to take control of your finances. Now is the time to get ahead of your debt and raise your borrowing power. And when you’re finally ready to take the leap, turn to the experts at Summit Real Estate to find the home of your dreams.