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Tips for Managing Your Debt Before Buying a Home

By June 1, 2022No Comments

Buying your first home is an exciting moment. You’ll likely spend long hours with a real estate pro as you look for homes for sale in your area. Whether you go with a pro or do it on your own, you should find a lender and talk about getting a mortgage first. This allows you to get a pre-approval letter that shows you’re a serious buyer and how much you can spend on a new home. No matter how much debt you have, you can learn how to manage and deal with it before you start shopping.

Know Your Debt Ratios

Lenders often look at two different ratios when you apply for a home loan. The first is your debt to credit ratio, which shows how well you manage your debt. Lenders can see how much debt you have in relation to your available credit. They will also look at your debt-to-income ratio, which is how much debt you have compared to the total amount of money you make. Lenders often award bigger loans to those with low ratios in both areas.

Debt and Credit Scores

You should know that your credit score plays a significant role in how much money you can borrow. The size of the mortgage you get often depends on how much debt you have and your credit history along with your credit score. Debt can affect your credit both positively and negatively. If you have a strong history of paying off any debts you have, you’ll have a higher credit score and can get a loan easier. Negative marks on your credit report such as late payments or a past due hospital bill will lower your score and make it harder for you to get a mortgage.

Check Your Credit Report

Before you apply for a mortgage, request a copy of your credit report. All three of the bureaus that report credit scores can give you a free copy of your report. As you look at it, make sure you look for things that should not be there. You might find a late payment that a credit card company removed or an account that you paid off. There is also a risk that you might find a card in your name that you never opened. You can contact each bureau and request that they remove that mark. When you win, your credit repair case will improve your score.

Consider Debt Consolidation

If you have quite a bit of debt and don’t think you’ll qualify for a mortgage, consider working with a debt consolidation company. These companies work with your lenders and can work out repayment plans that cost less than you might think. You might choose a company that asks you to send them a check every month. They will then send money to each creditor. Another option is a debt consolidation loan, which allows you to pay off your debt at a lower interest rate. You make one payment a month, which is easier to remember than making multiple payments to different creditors. Look for other pros who have local offices that can help you repair your credit.

Pay Down Debts

To get a mortgage that works for you, you should try to pay down some of your debt before you apply for a loan. Keeping your debt level low can help you get a better mortgage than you thought you could. It doesn’t take as much time to pay off credit cards and other debts either. Instead of making just the minimum payment every month, look for ways to send a little more or even double the amount due. Those with less debt have a better chance of getting a good loan than someone who has more debt.

Look Into Payoff Options

Do you ever look at your credit card bill and worry that you’ll never pay it off? This is especially true if you have a large amount of debt. Creditors occasionally offer payoff options that allow you to pay less than the total amount you owe. Say that you owe $5,000 to a credit card company and can only afford to pay the minimum balance each month. You can contact the company and ask for a payoff amount. This is the amount they will take to settle your debt. It’s often easier to negotiate a payoff amount when you show that you haven’t used the card recently.

Look at Alternative Loans

If you have a very low credit score or a bad score, consider an alternative loan. These lenders work with people who cannot secure a mortgage from a traditional bank. One example is a loan from the Federal Housing Administration (FHA). The FHA offers home loans to individuals with a credit score of 500 or higher. Unlike other lenders who provide the funds you need to buy a home, the FHA guarantees your loan. This government agency allows a lender to know that they will get their money back if you default on your mortgage. The VA and USDA also offer loans for people who have bad credit. You may find a program in your area that does not require you to have a down payment to get your loan too.

How to Deal with Debt When Purchasing a Home

Purchasing a home allows you to escape the hassles of renting. You no longer need to pay someone else and help them build equity in their home because a mortgage lets you build equity in a place you own. Whether you have good or bad credit, you need to know how to deal with the debt you have before you buy a home or even apply for a loan. You can consider alternative loans and work on paying off the debt you have or use debt consolidation and fix your credit report to buy your first home. Call Vilt Law in Houston, TX to get started today.