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Debt Management Solutions for Prospective Home Buyers
The home buying process is known for being lengthy, stressful, and expensive. However, with adequate preparation and determination, the road to your next home can be smooth and satisfying. If you’re planning to purchase a home within the next six to 12 months, focus on getting your finances under control, starting with debt management.
Evaluate Your Financial Position
Prospective homebuyers are more likely to obtain mortgage approval by meeting the following financial prerequisites.
- Debt-to-Income Ratio
One factor that determines purchasing power is your debt-to-income ratio, which is the sum of your monthly debt payments divided by your gross income. Lenders use DTI to assess what a borrower can afford. The Consumer Financial Protection Bureau regulates that this ratio cannot surpass 43%. - Down Payment
Certain loan programs, such as an FHA mortgage, enable buyers to provide as low as 3.5%, but any down payment under 20% usually requires private mortgage insurance. - Credit Score
Typically, a credit score of 620 or higher is needed for conventional loans. Higher scores tend to qualify for better interest rates.
Build Your Credit
Your credit rating is a huge indicator of your financial stability. If your credit history is less than stellar or nonexistent, employ these strategies to boost your score.
Check Your Credit Report Regularly
You can view your report with the three credit bureaus annually. Periodically monitor your credit report to keep a pulse on your financial health, and quickly address any discrepancies.
Choose Credit Cards Strategically
Use credit cards wisely by selecting ones with low annual rates, minimum or no annual fees, and generous rewards programs.
Keep Your Balance Low
A good rule of thumb is to keep your credit card balance below one-third of your given limit. Anything above that can negatively impact your credit score.
Use Auto-Pay
Ensure that you never miss a payment by setting up automatic payments on your cards and other financial obligations.
Build Your Credit
Your credit rating is a huge indicator of your financial stability. If your credit history is less than stellar or nonexistent, employ these strategies to boost your score.
Analyze Your Debt
According to a 2021 study, the average American household owes $8,701 in credit card debt. However, assuming some debt such as education loans, mortgages and business financing enables people to enhance their lives in meaningful, long-lasting ways that otherwise may not have been feasible.
Minimize debt related to cars, clothes, and consumables, which all depreciate over time. Before purchasing with a credit card, be sure that you can completely pay off the balance by the due date.
Create a Debt Reduction Plan
Knocking down debt is much more doable when you have a solid plan in place. Follow these tips to set up an effective debt management plan:
- Track and prioritize expenses
- Develop and stick to a budget
- Consolidate debt
- Create a separate account for homebuying funds
Maximize Your Savings
Fast-track your savings using a combination of strategies: getting a second job, using rewards apps for money back on groceries, and depositing cash into a high-yield savings account.
Business owners looking to buy a home should consider if their current business structure is helping their finances. Often, limited liability companies are preferred because they provide tax advantages and reduce potential liability. Check the rules regarding LLC formation in California before you make one, as each one sets its own regulations.
Turn to the Professionals
Seek credit counseling services if you need help managing debt and meeting savings goals. You can get support to negotiate lower interest rates and more.
If you’re worried that debt will interfere with your ability to buy a home, start using a debt management plan. Once your finances are in order, you’ll be well on your way to securing your new home.
NELA Group is committed to providing a better quality of life through housing that enhances health, happiness and well-being. Call 323-770-4510.